+ InnovatIon & entrePreneUrSHIP 47486 InternatIonal good PraCtICe For eStaBlISHMent Review of experiences in oF SUStaInaBle select countries, including three country case studies: It ParKS Vietnam, Russia and Jordan An info Dev publicAtion prepAreD by: PriceWaterHouseCoopers, India JUne 2008 Information for Development Program THE WORLD BANK www.infoDev.org InternatIonal good PraCtICe For eStaBlISHMent Review of experiences in oF SUStaInaBle select countries, including three country case studies: It ParKS Vietnam, Russia and Jordan An info Dev publicAtion prepAreD by: PriceWaterHouseCoopers, India June 2008 Information for Development Program www.infoDev.org ©2008 the International Bank for reconstruction and development/the World Bank 1818 H Street nW Washington dC 20433 telephone: 202-473-1000 Internet: www.worldbank.org e-mail: feedback@worldbank.org All rights reserved the findings, interpretations and conclusions expressed herein are entirely those of the author(s) and do not necessarily reflect the view of infodev, the donors of infodev, the International Bank for reconstruction and development/the World Bank and its affiliated organizations, the Board of executive directors of the World Bank or the governments they represent. the World Bank cannot guarantee the accuracy of the data included in this work. the boundaries, colors, denominations, and other information shown on any map in this work do not imply on the part of the World Bank any judgment of the legal status of any territory or the endorsement or acceptance of such boundaries. rights and permissions the material in this publication is copyrighted. 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To cite this publication: International good Practice for establishment of Sustainable It Parks. review of experiences in select countries, including three country case studies: Vietnam, russia & Jordan. Washington, dC: infodev/World Bank 2008. available at http://www.infodev.org/publications table of Contents Chapter 1. Executive Summary 1 Chapter 2. IT Sector: Alternate Development Models 19 Chapter 3. IT Parks: What Has Worked and What Has Not 25 Chapter 4. IT Sector: Policies and Their Impact 55 Chapter 5 Country Case Studies 73 Appendix 1. Indicative Internal Rate of Return for Select IT Parks 129 Appendix 2. Indicative Internal Rate of Return for Select IT Parks 131 Appendix 3. Discussion Participants 133 References 139 LIST OF FIGURES Figure 1. Key Players ­ IT Goods Trade, 2004 20 Figure 2. Key ICT Indicators for Different Countries, 2004 21 Figure 3. The CLIP Framework 26 Figure 4. Space Rental (USD/sq. ft) 33 Figure 5. Electricity Tariff (cents/unit) 34 Figure 6. Road Connectivity, SSP 41 Figure 7. Distribution of Infocomm Manpower 42 Figure 8. Space Rental/Cost 44 Figure 9. Foreign Citizens in CFZ 44 Figure 10. Capital 45 Figure 11. Linkages 45 Figure 12. Infrastructure 46 Figure 13. People 46 Figure 14. Business Models for IT Parks 47 Figure 15. Types of Government Policy Instruments 54 Figure 16. Fiscal Policy Highlights for Different Countries 56 Table of Contents iii Figure 17. Innovation Policy Highlights for Different Countries 58 Figure 18. Human Capital Policy Highlights for Different Countries 60 Figure 19. Investment Climate Policy Highlights for Different Countries 64 Figure 20. IT Sector Share of GDP 64 Figure 21. Vietnam IT Sector Composition 72 Figure 22. Top 5 Vietnamese IT Companies (2005) 72 Figure 23. Key ICT Indicators for Vietnam 73 Figure 24. SHTP Master Plan 79 Figure 25. Comparative Salaries in IT Sector 83 Figure 26. Government Policy Instruments 86 Figure 27. IT Sector Growth Segments & Strategies 87 Figure 28. IT Parks ­ Segment-Specific Drivers 88 Figure 29. Policy Good Practice for IT Sector Development 90 Figure 30. Policy Good Practice for IT Park Development 91 Figure 31. GDP and IT sector 91 Figure 32. Composition of the Russian IT Sector 92 Figure 33. Top 10 Russian IT Companies (2005) 92 Figure 34. Location of IT Companies (2005) 93 Figure 35. IT Services Exports 93 Figure 36. Exports by Different Players 93 Figure 37. Manpower Deployment in Captive Development Centers in Russia 94 Figure 38. Key ICT Indicators for Russia 95 Figure 39. Location Map of MSU Science Park 97 Figure 40. Throughput 99 Figure 41. Comparative IT Salaries 99 Figure 42. Existing Government Policy Instruments 101 Figure 43. IT Sector Growth Segments & Strategies 103 Figure 44. IT Parks ­ Segment Specific Drivers 104 Figure 45. Policy Good Practice for IT Sector Development 107 Figure 46. Policy Good Practice for IT Park Development 108 Figure 47. GDP and IT Sector 110 Figure 48. Composition of the Jordanian IT Sector 110 Figure 49. Composition of Revenues (2004) 110 iv International Good Practice for Establishment of Sustainable IT Parks Figure 50. Revenues by Industry Sectors (2004) 111 Figure 51. IT Exports 111 Figure 52. Exports by Destination (2004) 111 Figure 53. Key ICT Indicators for Jordan 112 Figure 54. Average IT Salaries 2004 117 Figure 55. Comparative IT Salaries 117 Figure 56. Government Policy Instruments 119 Figure 57. IT Sector Growth Segments & Strategies 120 Figure 58. IT Parks ­ Segment Specific Drivers 121 Figure 59. Policy Good Practice for IT Sector Development 122 Figure 60. Policy Good Practice for IT Park Development 122 Table of Contents v vi International Good Practice for Establishment of Sustainable IT Parks executive Summary 1.1. Background 1.2. IT Parks: What Has Worked and What Has Not Historically, Science and Technology Parks have typically evolved around tertiary educational The first step in this assessment was to identify five institutions or other research organizations. The role countries for analysis, from which a total of six IT of science and technology parks has been to: Parks were selected to get a representative sample covering both (i) successful and not-so-successful Recruit and co-locate new and established IT Parks , and (ii) IT goods as well as IT and BPO knowledge-based companies; (Business Process Outsourcing) services. Our Promote innovation based on "smart" technolo- analysis has been based on the CLIP framework, gies; the individual components of which have been Provide an interface or shared research environ- detailed below: ment for research organizations and private industry; and Capital attempts to assess i) Investment, Leverage local knowledge resources to enhance a ownership, and management issues of the IT region's economic base. Park in terms of how it has been funded, role of the government and the private sector; ii) Mix of The United States and select countries in Europe anchor occupants and early stage companies in were the first to set up dedicated science parks the park and iii) Provision of business incubation during the sixties. Many of these parks were set up services by the park management and availability to cater to knowledge or technology-intensive of private equity/venture capital and other sectors like engineering, chemicals, and electronics. means of financing; In Asia, the phenomena of setting up dedicated Linkages include i) Nature of products and parks to enable knowledge sharing started in the services offered by key occupants and their fit early seventies in several countries. Japan and Korea with the target markets; ii) Assessment of forward took the lead, focusing on basic research and and backward linkages of key occupants of the development activities conducted by government park; iii) Relationships between key occupants research and development institutes, and universi- and resource organizations such as academic ties. It was only in the late seventies and early institutions and R&D centers, given the nature eighties that the non-government sector started of products and services offered by key occu- setting up operations in such parks to avail the pants; and iv) Value-added services offered such benefits of government supported R&D. In the late as market access, business planning and opera- nineties, developing countries increasingly started to tional support, and developing appropriate establish similar parks as a preferred tool for promot- linkages within and outside the park; ing their information technology (IT) industry. Infrastructure addresses i) Availability and relative Given that these countries were often constrained cost of land/space; ii) Quality of physical by severe infrastructure limitations, it was easier to infrastructure including connectivity and urban provide state-of-the-art physical, communication, infrastructure.; iii) Nature of social infrastructure and social infrastructure within a designated area to like recreational facilities, and remoteness; enable IT companies to operate. iv) Political stability and law & order and v) Intra-park, domestic and international data & voice connectivity; Executive Summary 1 People issues in terms of i) Quality of educa- ing the requisite depth to the venture capital/ tional institutes; ii) Annual employee salaries & private equity market at the national level is also benefit levels and iii) Availability of people both essential, as it enables transfer and sharing of in terms of numbers and skill-sets. good practice. Singapore, India and China represent some of the countries which have been Based on our assessment of the six IT Parks in three able to achieve a degree of success in this area. developing and two developed countries, the critical IT Parks offering incubation services help business success factors for setting up IT Parks based nurture entrepreneurship and development of on the CLIP framework of analysis have been identi- the SME sector in the local economy. The IT fied below: Parks gain when these operations scale up to become regular occupants. An example is ZSP 1.2.1. Capital in China, which offers specialized incubator While IT Parks may be owned by either the services for overseas Chinese IT professionals government, private sector or both, it is essential seeking to return to China. These services have that they are managed by the private sector, given resulted in over 450 startup entities. its operational flexibilities and ease of decision- making as compared to the rules and regulations 1.2.2. Linkages that government entities must adhere to. Close working relationships with academic institu- The success of an IT Park in attracting IT tions like universities, colleges, and R&D institutes, companies to occupy space/facilities within the are essential for IT parks like Taedok Valley, park is largely dependent on the reputation and Singapore Science Park and ZSP, where the primary credibility of the anchor tenant. Though the IT focus of some key occupants is on technology Park developers have to offer various concessions innovation in the areas of EDP equipment, telecom- and incentives in terms of subsidized rates, usage munications, integrated circuits and electronic fees, and preferential treatment, having a components. The nature of requirements require globally reputed IT company as anchor tenant leveraging of specialized R&D infrastructure for results in other smaller players. This is because basic and applied research, and prototyping which these smaller players are attracted to the park are usually available with prominent academic and with the knowledge that the IT Park must have R&D institutes. Consequently, many of these IT world class infrastructure and facilities to be able parks have attempted to facilitate linkages between to attract an IT player of repute as an anchor these institutions and industry players by co-locating tenant. IT Parks like Hitec City India and them. For example, KAIST and ETRI are located Singapore Science Park have been able to market within Taedok Valley. Quinghua University, Beijing the park to occupants based on the fact that University, and the Chinese Academy of Science are reputed organizations like Microsoft, Oracle occupants of ZSP, and institutes like the Centre of Corporation, and DNV were already present in Wireless Communication and the Institute of the park as anchor tenants. Microelectronics are located within the Singapore Angel investment, venture capital, and private Science Park. equity have been identified as key enablers, specifically for development of start-ups and On the other hand, such linkages are usually not as small and medium enterprises. Consequently, in critical in IT & BPO Services where innovation countries like Korea and China where the requirements are usually based on service delivery presence of global angel investors/venture around existing software and hardware products, capital/private equity funds is limited, IT parks and most market leaders possess the requisite like Teadok Valley and Zhongguancun Science competencies in-house. Park (ZSP) have set up their own dedicated venture capital funds, usually administered by However, for both the above categories of companies, government agencies/bodies. In addition, most availability of quality manpower resources is key to successful parks have business incubation centers success and hence dictates the performance of the IT for supporting start-ups and small companies. Park. Consequently, many of the IT parks have been However, irrespective of the venture capital/ set up in close proximity with prominent academic private equity setup of the individual park, infus- institutions, centers of learning. In addition, factors 2 International Good Practice for Establishment of Sustainable IT Parks like existing infrastructure and amenities, and than twice those of India and China, although they employment regulations play a key role in attracting are around 30% of near-shore locations like Ireland. the right competencies from other locations. Given that the revenues are primarily being driven by captive shared services and data centers of global 1.2.3. Infrastructure companies, this seems to be a conscious strategy of It is clear from the case studies that physical leveraging its not-so-distant location and cost infrastructure is important. Examples of this advantages vis-à-vis primary outsourcing customers infrastructure include roads, urban infrastructure, in the United States and Europe. social amenities for recreation and sports, proxim- ity to airports, virtual infrastructure in terms of A supportive and proactive government is key state-of-art data, and voice connectivity. While they Each of the case studies underlines the importance may not serve as competitive differentiators as far of the role of government in the development of as IT Parks are concerned, they are absolutely successful IT parks. The extent of government essential prerequisites. In fact, weaknesses in this involvement has varied in individual countries, with area have been identified as one of the primary some acting as investors and promoters and playing reasons for the underperformance of the IT Park at a key role in managing the parks (for example, in Hubli, India. countries like Korea and China), in addition to playing their traditional roles of regulators and facili- 1.2.4. People tators. On the other hand, countries like Singapore Availability of qualified and skilled manpower is have gradually moved to a model wherein develop- essential to the success of any IT Park in attracting ment and management of IT parks are primarily IT players as occupants. IT Parks, especially in carried out by the private sector, with the govern- developing countries like India, China and Malaysia ment ensuring a conducive policy environment. The have the capacity to generate employment for the relatively late entrants like India, Malaysia, and even educated population in the local economy, leverag- some of the more recent parks in China like the ing the low cost of skilled human resources as Dalian IT Park are based on this model. Some compared to developed countries. countries, like Korea, are gradually moving to a model where the private sector, including foreign Other key lessons emerging from the case studies are investors, are likely to play a major role in the as follows: promotion and management of IT parks. Nevertheless, the government is expected to Having the right product-services mix is critical continue to play a key role in terms of formulation Most of the parks that have not underperformed of appropriate policies for: have by and large focused on products and services in which their countries of operation have a competi- encouraging innovation through financial and tive edge. Thus, Hitec City in India is focused non-financial measures, including protection of primarily on IT and BPO services, while ZSP in intellectual property; China is focused on EDP and office equipment, promoting investments through appropriate software (China-centric in the form of word financial & tax incentives, together with efficient processor and digital publishing), and IT services. and user friendly processes for implementing the Similarly, most of the ventures in Taedok Valley have policies; and basic and advanced telecommunication as their facilitating capacity building by encouraging primary focus. The only exception is Cyberjaya in mobility of skills, appropriate employment Malaysia, which appears to have IT and BPO policies, and extending financial support to services as the primary revenue earners for its select capacity building initiatives. occupants. This is contrary to Malaysia's traditional strength in assembling EDP and office equipment. Examples include the Malaysian and Indian Malaysia's annual IT and BPO services exports governments, both of which have adapted the single during 2004 were estimated at USD 120 million and window mechanism for providing requisite USD 40 million respectively--significantly lower approvals to IT sector companies through the than market leaders like India, Ireland, and Canada. Multimedia Development Corporation and STPI The average salary levels in Malaysia are also more respectively. Executive Summary A vibrant and pro-active it park management followed a consistent approach to policy interven- team represents an added advantage tions for the development of the IT sector. However, In addition to having the right infrastructure and the level of direct government involvement varies linkages, the relative performance of an IT park is across individual economies, with some govern- also dependent on the competence and level of ments adopting a facilitative approach and others initiative of its management team. Consequently, opting for direct interventions. For example, while parks promoted and managed by groups/companies the Government of India has primarily depended on with requisite expertise have been found to outper- private sector venture capital/private equity invest- form others. For example, the extensive marketing ments, China has opted for government-sponsored initiative launched by the private sector promoters venture capital funds. Key trends in policy develop- L&T Infocity was one reason that Phase I of Hitec ments that appear to have an impact on the City was fully booked within the first four months performance of the IT sector as well as policy of construction. The initiative of the management initiatives that facilitated the growth of IT sectors in team emerges as a key differentiator not only at the general and IT parks in particular, all based on the time of marketing the park but also during subse- case studies are discussed below: quent operation, particularly for start-ups and smaller companies that are at times dependent on Adopting a holistic approach to policy them for the required market and financing development is key linkages. To this end, some IT park management As development of the IT sector and IT parks is companies like Ascendas have established relation- dependent on a number of other sectors like telecom- ships with organizations specializing in services such munications, roads, airports, venture capital/private as business planning and market assessment and equity, and capital markets, most successful countries offer these services to occupants. It has also been have put in place suitable policies for improving observed that the private sector inevitably has an efficiencies and service levels in these sectors. Thus, advantage on this front, as it has requisite practices countries like Singapore were some of the earliest to in place to reward (or penalize) the respective put in place requisite policies for facilitating competi- management teams depending on their perfor- tion and private sector participation in telecommuni- mance, unlike governments in most developing cations and infrastructure, ensuring effective countries where performance-based management is regulation and development of the financial services still in its initial stages. sector, including capital markets. Even India, which is categorized as a developing country, has a policy regime that supports private sector participation and competition in most of the supporting sectors, in 1.. IT Sector Polices and their addition to a well regulated and vibrant financial Impact services sector. On the other hand, countries like China have yet to achieve the same level of maturity in their financial services sector and hence have to As in most other sectors, government policies and depend on government-sponsored venture capital interventions have played a key role in the develop- funds for supporting IT sector development. ment of the IT sector in individual economies. The role of government has also evolved over time efficient institutional and implementation depending on the level of maturity of the sector. mechanisms are critical While government institutions/organizations in While most countries have adopted regulations in many countries have played a direct role in facilitat- line with established good practice, establishing the ing development of the sector in the initial stages, proper institutional mechanisms are integral to the government has shifted to a facilitation role once effective implementation. Most countries have the sector has attained critical mass, with much of attempted to achieve this by constituting nodal the subsequent growth initiatives being led by the organizations within government for providing private sector. "single window services." For example, most of the incentives offered to the IT sector and IT parks in 1.3.1. Policy Good Practice Malaysia are administered through the Multimedia An analysis of the regulatory and policy regimes in Development Corporation. In India, most of the different countries reveals that most countries have benefits and concessions are offered through the International Good Practice for Establishment of Sustainable IT Parks Software Technology Parks of India, which has all companies in the IT sector, not just to those offices throughout the country. located in a designated IT park. The developer of an IT park requires various encouraging private sector participation is clearances for constructing buildings and related critical facilities in the IT park. Such clearances include Almost all countries have adopted a variety of policy building plan sanctioning, fire services clearances, mechanisms for encouraging private sector invest- sewerage and drainage clearances, and environmen- ment, not only in the IT sector, but in developing tal related clearances. A one-stop clearance agency "support" sectors such as financial services, telecom- helps the developer get these IT park-related munications, and physical infrastructure develop- clearances faster, which helps them reduce time and ment. Other than a few niche areas such as specific thus enables reduction in project costs. For example, research and development initiatives where govern- in Hyderabad, APIIC acts as the single point ment organizations have played a direct role, the clearance agency for building and related construc- government's role in most countries has been that of tion of Hitec Park. Developers have significantly a facilitator. While in some countries this represents gained from this arrangement. a conscious decision on the part of the government, in others it has also been driven to an extent by existing budgetary/fiscal constraints. Intellectual property protection policies represent another case in point. While most countries like Many of the parks studied were developed through China and India have amended their Copyright Acts public-private partnerships. Such policies have in line with TRIPS and have also set up dedicated benefited both the private sector as well as govern- Copyright Tribunals for adjudication, litigants have ment. For example, in case of Cyber Towers, the the option of approaching the existing judicial system Hyderabad state government contributed by provid- as a final recourse. With the existing legal system in ing land, and the private player was responsible for both these countries being considered relatively less developing the land and constructing the building. efficient, value added intellectual property related IT Acquiring vast plots of continuous land would have activities such as new technology development have been very difficult and time consuming for the private taken a backseat compared to other countries like sector. However, with the government acquiring land Singapore and Korea, which have a faster process through legislative means, the private sector develop- and a more streamlined judiciary. ers were able to ensure that the related facilities were Focused policies for it park development are constructed in a record time of 18 months. critical for "developing" ict economies Flexible land-use policies providing the Leveraging IT Parks for IT sector development developers more choice becomes critical in economies like China and India Flexible land use polices permit the developer to which lag behind developed countries in key ICT bundle IT office space construction with construction indicators. With development of the IT sector of other facilities such as shopping complexes, hotels, being closely linked with "support" sectors like eateries, and housing complexes. Such bundling telecommunications and physical infrastructure, makes the project financially more attractive, given it is easier to provide these support services in that the returns from the commercial/residential end geographically concentrated zones/areas. use are typically higher. For example, in CFZ, Consequently, many of these countries have Malaysia, 500 hectares of land has been zoned as adopted policies for encouraging development of commercial use. In Hitec City, Hyderabad, 40% of IT Parks. An example of such a policy is the the net developable/usable area can be used for Information Technology Special Economic Zone housing, a club house, recreational center, shopping (SEZ) policy in India, which offers a number of center, a school, and other support activities. fiscal and other benefits to companies located in approved IT Parks. On the other hand, countries linking incentives/subsidies with identified like Singapore, where the requisite support in terms strengths/core competencies of domestic of world class telecommunication and physical companies infrastructure is available throughout the country, In developing countries like India and Malaysia, most have adopted policy regimes that are applicable to IT and ITES companies are export oriented, with Executive Summary the major markets being the United States and these sectors for faster development, and motivating Europe. It may be observed that governments in these IT sector participation in capital markets. Thus, countries offer a number of fiscal incentives on export while India provides additional flexibilities to IT & income/profit. On the other hand in countries like BPO companies for listing on premium stock Singapore, where the target market segment for most exchanges in terms of a lower paid-up share capital IT companies is high-technology, research-intensive vis-à-vis companies in other sectors, almost all the products, the subsidies and incentives offered by IT Parks covered in the study allow mixed land use government agencies are linked to R&D spending. with a specified proportion of the total land area Adopting fiscal policies to suit the strengths and earmarked for business end use, commercial end markets of indigenous companies is an effective use, and residential purposes. It is essential for policy measure to promote the domestic industry. incorporating such flexibilities to existing policies or promulgating new policies with these flexibilities to effective coordination with other ministries/ maximize economic development. departments It is important to understand that the presence of Fostering efficient linkages with other good policies alone does not suffice. It is equally economies is essential important that these policies get efficiently imple- All successful countries are observed to have policy mented. For proper implementation of policies, it is and regulatory regimes that encourage trade and important that there is effective coordination among investment linkages with other economies. Such various government ministries, agencies and linkages are usually facilitated through a variety of departments. Countries have taken different policy instruments such as liberal foreign direct strategies to enable such coordination. In developed investment (FDI) guidelines, non-restrictive visa/ countries like Singapore, proper coordination work permit procedures, unrestricted trade in goods between various departments and ministries adminis- and services, and double taxation avoidance trating the subsides and incentives has been ensured agreements. However, the level of maturity of the through efficient e-Governance systems. In develop- individual policies varies, with countries like ing countries like India and Malaysia, a dedicated Singapore adopting a relatively lower duty structure government agency has been created to administer for imports across sectors, while others like India the subsidies and incentives. For example, in Andhra offering a concessional duty structure for all capital Pradesh, India, incentives are administered through goods imports specifically for the IT sector. a high level coordination committee called Consultative Committee on IT Industry, which Additional flexibilities exist for policy includes members from various government formulation in a federal structure of departments (such as Information Technology and. government Communication, Labor Department, Municipal In countries like China, India, and Korea, which Affairs Department, and Land Department.), follow a federated structure with both central utilities (electricity, water supply) and industry (federal) and state (provincial/local) governments, associations (such as HYSEA and NASSCOM). governments have attempted to differentiate This committee is responsible for granting various themselves by providing additional benefits/ provincial/state subsidies, resolving implementation concessions to IT/IT park companies. For example, issues and prescribing guidelines for industry growth. in India, a number of state governments offer additional flexibilities/benefits, such as subsidies on Having the right policy mix is essential for capital investments and interest payments and maximizing spillover benefits offering discounted land prices linked to employ- As has been established through the IT Park case ment generation. In Korea too, much of the studies, successful development of an IT Park policymaking has gradually shifted from the federal inevitably leads to significant spill-over benefits in to the provincial governments. Such initiatives have terms of other economic activities such as real estate led to differential development of the IT sector in development and vibrant retail, hospitality, and different geographic regions within the same financial services sectors. Many governments have country, with local governments attempting to attempted to maximize these spill-over benefits differentiate themselves through additional benefits/ through a suit of policies such as allowing flexible concessions and investor-friendly implementation land use, encouraging private sector investments in mechanisms. International Good Practice for Establishment of Sustainable IT Parks For countries aspiring to offer offshore bpo skilled manpower for the IT sector may take 5­10 services, formulation of a data protection act years to be effective after implementing the policy is a necessity initiatives through the school system. Quick wins, In view of the recent breaches in security in various although being far from comprehensive solutions in BPO organizations, enactment of a data protection themselves, act as building blocks to a sustainable IT law has become a necessity. This has gained further sector development. importance with the data protection directive issued by the European Union (EU), which constitutes one 1.3.2.1 Short-term policies of the biggest markets for providing offshore BPO Some of the key priority short term policies are services. Based on this directive, the United highlighted below: Kingdom has already enacted its `Data Protection Provide fiscal incentives to encourage private Act'. The EU directive and enactment of Data sector participation Protection laws by member countries imply that Government needs to provide fiscal incentives to only countries having data protection laws in line encourage private sector participation in the IT with the EU directives will be favored for off- industry. These incentives could be in form of tax shoring BPO services from EU member countries. exemptions. For example, in India, IT and ITES Some countries attempting to emerge as offshore companies are provided with 100% exemption on BPO destinations have already formulated policies profits from export of computer software until addressing this issue. In the Philippines, for 2010. They could also cover areas such as customs example, the Department of Trade and Industry has benefits, subsidies for employment generation, and issued "Guidelines for the Protection of Personal equity support for start ups. However, it is also Data in Information and Communications System critical that governments not just focus on providing in the Private Sector". The guidelines also provide such incentives to the IT companies, but also to for an independent third party, namely, Data support sectors like physical infrastructure develop- Protection Certifier, duly accredited by the govern- ment (transportation, telecommunications and real ment, to certify the privacy program of a company estate). For example, the government of Singapore and thereafter to monitor and oversee its implemen- removed restrictions on telecom licenses to intro- tation and enforcement. duce and encourage full competition in the telecom sector. Similarly, in India, the National Telecom 1.3.2. Policy Prioritization Policy of 1999 opened up the telecommunications It is evident that governments need to undertake a sector to private players. A number of private sector number of policy interventions to develop the telecom operators started operations as a result, country's IT sector. The government's role in leading to immediate improvement in the country's facilitating the growth of the IT sector is primarily communication infrastructure and customer service through developing holistic IT strategies linked to delivery due to increased competition. the core competencies of the particular country, such as innovation through R&D activities and low- Establish an effective implementation cost skilled manpower. The country's IT sector mechanism ­ single-window nodal agency growth strategy would require policy enablers, who Effective implementation of incentive policies is would form the basis for formulation of specific one of the most important factors attracting private policy initiatives. Given that implementation of an sector investment. The establishment of proper IT strategy is crucial to economic growth, especially institutional mechanisms are integral to effective for developing countries, some policy initiatives may implementation, with most governments preferring have short term implications, like attracting IT to set up single-window/one-stop services. Such players to the country. Other policies have long term nodal agencies provide a one stop servicing facility implications, like ensuring sustainability of the IT for developers of IT parks as well as the occupants/ sector. Policies that can be implemented in the short residents of such parks. An example of such single- term have an immediate beneficial impact for the window/one-stop service nodal agency is Multimedia sector or "quick wins." The impact of policies Development Corporation in CFZ, Malaysia, which typically aimed at sustaining the sector are seen over is the single point of contact for park occupants for the long and medium term like for a non-English obtaining requisite government approvals and speaking country to ensure English speaking IT facilitating business linkages with the government. Executive Summary Create a coordinating committee that fosters individuals desiring to connect with and mutually linkages with various government ministries/ leverage complementary skills, services, resources, departments/agencies contacts and talents within the country. This also It has been observed that developing an IT park provides an ideal forum for overseas and domestic requires the involvement of various government companies to explore the vast potential available for ministries, departments, and agencies. It would be Joint Ventures, Strategic Alliances, Marketing beneficial if a coordinating body comprising Alliances, Joint Product Development, etc. An members from various government departments example of such an Industry Body is NASSCOM (like Information Technology & Communication, in India. Labor, Municipal Affairs, and Land) and utilities (such as electricity and water), be formed. Such a Design flexible land use policies for attracting coordinating body could be charged with approving private real estate players an IT Park developers' plans, acquisition of land, Flexible land use policies are required to attract and issues relating to utilities & supporting infra- private sector real estate players to invest in the structure. This will also ensure a fast track clearance development of IT parks, since such policies can and approval process. An example of such a commit- ensure higher returns on investments for the tee is the "Consultative Committee on IT Industry" developer. Such policies typically allow mixed land- in Andhra Pradesh, which is empowered to grant use, i.e., residential and commercial land-use along various provincial/state subsidies, and to resolve with industrial land-use. Other means of providing implementation issues. incentives to developers include allowing a higher floor space ratio. The Floor Area Ratio (FAR) or Promote/Facilitate creation of an industry body Floor Space Index (FSI) is the ratio of the total specifically for promoting and development of floor area of buildings on a certain location to the it sector size of the land of that location. By allowing a Steps should be undertaken by the government to greater FSI, government enables the private facilitate/promote the creation of an industry body investor to create more space that can be rented out for the IT sector, which could represent the indus- or sold to occupants, enabling them to realize try's interests in issues like government procurement, higher revenues. information security, workforce development, intellectual property protection and accounting, 1.3.2.2. long-term policies finance and taxation, and act as a bridge between In addition to the above-mentioned short term industry and policymakers. One of the main policies that can be implemented on a priority basis objectives of such a body would be to maintain close to kick-start the IT sector development, govern- interactions with the government in formulating the ments should also consider implementing policies national policy and specific action plans for having long-term implications for ensuring sustain- development of the IT industry. The body's mandate ability of the IT sector. These include policies to may also include coordinating with foreign govern- attract private sector involvement in education; ments, embassies, etc. to make the visa and work foster linkages with other markets, such as the permit rules more industry friendly; interacting with capital market, to attract private funding; promote the education ministries and universities on corporate governance norms so that even if some industry's current & future skills requirements for short-term measures like fiscal incentives are ensuring necessary changes in curriculum; and removed, the continued development of the sector campaigning against and generating awareness of can be ensured. Long-term policies should be software piracy and copyright laws. aligned to the core competencies of the country. For example, if a country's IT strategy is to focus on Such an organization also offers valuable services to encouraging software development to leverage its its member organization in terms of encouraging low cost, educated manpower base, the government them to improve quality of service, adopt modern would need to improve the legal system to protect technologies and provide innovative solutions and promote proprietary knowledge, as this is often through organizing regular interactions/IT sector a company's main business asset. As such, laws seminars/meets. The existence of such an organiza- relating to intellectual property, and the implemen- tion also provides valuable linkages between tation of such laws would be critical to gaining entrepreneurs, investors, organizations and investor confidence. 8 International Good Practice for Establishment of Sustainable IT Parks 1.. Country Case Studies Export revenues primarily from software development activities at USD $70 million in 1.4.1. Country Case Study: Vietnam 2005 is largely insignificant. Exports are driven Based on our assessment of the IT sector in Vietnam, by software companies set up by overseas the following areas represent potential opportunities Vietnamese, mainly serving markets in the U. that can possibly be targeted for growth. S., EU and Japan. With Vietnam obtaining WTO membership and having enacted IT hardware assembly and re-export operations, Intellectual Property Protection laws in 2005 where Vietnam benefits from a strategic geo- (applicable from July, 2006), it is expected that graphic location, which is being leveraged by the domestic market for packaged software will global players for serving their Asia Pacific achieve significant growth in the medium term markets. The availability of engineering gradu- once appropriate mechanisms to curb software ates at annual salaries ranging between piracy are implemented. USD$6,000­$7,000 as compared to USD Vietnam is well placed to offer back office $9,000­$10,000 in India and China also adds to transaction processing services like finance and its competitive advantage. The hardware sector accounting, payroll processing, insurance claim revenues have doubled since 2002, resulting in a processing and other rule-based processing CAGR of 20%. A year-on-year growth of 50% services to U.S and EU based organizations. was recorded in 2005, primarily driven by There is a sizeable population of overseas growth in exports. With the expansion plans of Vietnamese in these countries, coupled with a existing players like Canon and new entrants like favorable time zone difference. However, to Intel setting up facilities in the country, it is effectively develop this sector, Vietnam will have expected that the current levels of growth to overcome the twin issues of i) ensuring an through exports in this sector will continue in adequate supply of skilled manpower and the near to medium term. The domestic demand ii) improving quality and reducing cost of for computer hardware products is also expected international data and voice connectivity. to grow at 15% to 18% annually, as more Consequently, this segment of the market is businesses, including the financial sector, move likely to develop over the medium term with towards increased automation. The domestic adequate government support. hardware market is currently dominated by local 1.4.1.1 role of it parks and proposed hardware assembly operations like FPT and business Models CMS. These local players also represent global Based on our assessment of Vietnam's IT sector and hardware companies as resellers of the global potential growth opportunities, we have attempted players like Toshiba, NEC, and HP. None of the to present our assessment of the critical business global players have manufacturing operations for enablers for developing sustainable IT parks in serving the domestic computer hardware market. Vietnam. Our assessment is based on case studies of Recently Intel has made a strategic investment of IT parks in other countries, including Vietnam, as over USD$36 million in FPT to take advantage well as the ground realities in Vietnam. of the growth in the domestic hardware market. Domestic IT services and software sector, The generic, critical business enablers that are likely driven primarily by the requirements of the to feature in the expectations of all categories of IT financial services sector and an e-government companies have been highlighted below. program that is being revived by the govern- ment. Global giants like Oracle and local Location of the park in an area that permits it to players like FPT have already been contracted leverage the existing urban and social infrastruc- to develop software for the World Bank-funded ture of the two key cities, namely, Hanoi and Treasury & Budget Management Information Ho Chi Minh City (HCMC), as availability of System by the government. Currently, the IT skilled human resources is expected to be a software/services sector, with revenues of problem in any other region. USD$250 million in 2005, is small compared Simplified policy implementation mechanisms to the IT hardware sector, despite having grown in terms of single-window facilities to provide at a CAGR of 29% over the past 4 years. operating licenses, sanction building plans, tax Executive Summary and customs duty registrations, etc. These pick up an equity stake in the development com- facilities would significantly reduce the time pany, given that financial returns on IT parks have needed for setting up new/expansion operations. been fairly attractive. High quality physical connectivity and infra- structure in terms of air (both international and 1.4.1.2 policy enablers domestic), road and rail connectivity; a combi- Given that government policies play a pivotal role in nation of multi-tenant buildings with contem- the development of the IT sector, we have high- porary facilities and build to suit options; lighted policy measures based on good practice adequate road and other surface transport adopted for implementation by many countries connectivity with the adjoining city; intra-park covered under our study, which the Government of roads, sewerage, electricity, etc. Vietnam may consider : Lease or sale of land for built to suit facilities at Policy Good Practice for it Sector Development rates lower than those prevailing in the adjoin- ing city. Fiscal Incentives State-of-art virtual connectivity in terms of data Extend reduced business income tax rates of 10% and voice infrastructure, including international for export-oriented foreign invested IT hardware connectivity. units, even if they are not located in designated technology parks/special economic zones. Most of the foreign-invested IT hardware assembling Introduce specific financing schemes targeted at units (e.g., Nidec, Canon) already operate out of domestic IT services and BPO companies, industrial parks with the park management ensuring possibly through state-owned banks, to help provision of basic facilities like quality uninterrupted them scale up operations. The government may power supply, water and sewerage treatment, establish a special fund to refinance bank lending telecommunication facilities, and single-window to the sector. clearance facilities covering import and export Exempt business income tax or charge a reduced processing formalities. Intel has announced plans to rate of tax on capital gains made from the sale of set up its proposed unit in the Saigon Hi Tech Park. equity in listed domestic IT companies to However, domestic IT companies generally operate encourage venture capital and private equity out of offices located in the cities of HCMC and funds to invest in the IT sector. This is likely to Hanoi, due to the proximity to their clients as well as enable domestic IT companies to obtain funds employees. With these cities offering the same to scale up their operations and achieve critical telecommunication infrastructure as the IT parks, business volumes to partner with global players. these companies do not have much motivation to relocate to IT parks, except those companies having Innovation Policies Reimburse part/full initial expenditure incurred expansion plans. It is expected that in the long term, IT parks will be required in Vietnam for accom- by domestic IT companies in obtaining quality modating global IT services players/large domestic accreditation such as SEI/CMM/BS 7799 from a players like FPT for setting up their software special fund established by the government. This development centers and BPO facilities. scheme may be applicable to those companies obtaining quality accreditation within a specific timeframe, say within the next three years. The IT Park case studies and primary interactions Establish a dedicated tribunal for dealing with with various stakeholders clearly seem to demon- disputes relating to infringement of copyright, strate a case for management of the IT Parks to be patents on designs for IT companies. The vested with private sector players for ensuring tribunal would ensure that cases are resolved adequate accountability and efficient service. within a specified timeframe. Possibly, as has been the case in many other countries, existing facility management companies Human Resource Policies like C B Richard Ellis, and Bovis Lend Lease can be Encourage private sector investment or public- considered for this purpose. Consequently, a private partnership through income tax conces- facilitation role is recommended for the government sions in establishing finishing schools to train other than in situations where the land is owned by final year graduate students in requisite skills it. In such situations, the government can possibly required for IT services and the BPO sector. 10 International Good Practice for Establishment of Sustainable IT Parks Establish a high-level multi-disciplinary commit- Policy Good Practice for it Park Development tee to track the changing needs of the IT sector and future demand for skills; and recommend Fiscal Policies Offer additional business income tax rate conces- changes in the curriculum for schools, colleges, and universities. Such a committee should include sions/longer income tax exemption periods to IT members from various government departments/ park occupants, in line with QTSC and SHTP. Provide land owned by government for develop- ministries, such as the Ministry of Education, Ministry of Post & Telematics, Ministry of ment and to IT park occupants at subsidized rates Science & Technology and industry representa- depending on level of employment generation. Support IT park developers by subsidizing tives such as HCMC Computer Association and the Vietnam Software Association. rentals for plug and play infrastructure and land lease rates for an initial period (say 3 years), so Investment Climate that a part of these subsidies can be passed on to Encourage e-commerce in the country through potential occupants, thereby creating a differen- enabling laws for establishing legal validity of tiation vis-à-vis normal office/commercial electronic signatures; institutionalize the process infrastructure. of issue and certification of digital signatures; prevent potential abuses of computer systems for Investment Climate enabling e-commerce transactions in line with Permit mixed land use in IT parks, allowing similar laws enacted in China, India, Malaysia, commercial and residential land use together Korea, and Singapore. with industrial land use, thereby improving Allow foreign direct investment in the telecom project viability. The proportion of such land use sector and remove entry barriers for foreign can be fixed, say 30% of the total build-up space. telecom players preventing them from investing Implement a single window mechanism for fiscal and participating in management of existing concessions and benefits, as well as all required telecom companies. Special tax concessions like statutory approvals, with a physical presence in reduced rate of Income tax for a specified period the park. and import duty exemptions for capital equip- Extend all the above concessions to local ment may be considered for global telecom players companies, subject to completion of listing on willing to invest in telecom infrastructure required Vietnamese Stock Exchange within a pre-defined for the growth of the IT sector in the country. period and extending additional fiscal benefits on Implement a single-window mechanism for successful listing on international stock ex- providing all benefits, concessions and permits changes. to IT companies. This would require a single agency within government to be identified as 1.4.2. Country Case Study: Russia the nodal agency, with a presence in all key Based on our assessment of the IT sector as part of cities. This agency would then process applica- the country case study, the following areas represent tions seamlessly in coordination with other potential opportunities that Russia can possibly ministries. target: Extend all the above concessions to local companies, subject to completion of listing on Domestic Market Opportunities Vietnamese Stock Exchanges within a pre- Unlike many other countries, such as Malaysia, defined period and extending additional fiscal India and China, realizations on domestic IT benefits on successful listing on international services in Russia are currently higher than in IT stock exchanges. services exports. There also appears to be significant Formulate policies for attracting global venture upside as far as growth in the domestic IT market is capital and private equity funds like exemption concerned, with turnover expected to increase to of tax on income from investments and allowing USD$14.32 billion by 2007 (Source: IDC losses to be deducted from other taxable income. Blackbook, Euromonitor). In terms of individual Deepen existing capital markets through market segments: measures such as demutualization, and attracting large global financial institutions and investment The demand for hardware is expected to increase banks. by a CAGR of 16.7% per annum to around Executive Summary 11 USD$10.5 billion by 2007, driven by govern- also global leaders in areas such as semiconduc- ment spending and industry demand, with many tors and telecommunication equipment of the customers being in the process of acquir- manufacturing, expansion of their activities in ing their first information systems. Based on our Russia to cover other areas represents a potential assessment of key trends, there appear to be opportunity. These areas include fabless chip significant opportunities in the semiconductor design for IT, telecommunication equipment industry in the near term, driven by increasing and consumer durables, chip fabrication/ over demand from IT hardware, telecommunica- foundry facilities and semi-conductor packag- tions equipment and the consumer durables ing, assembly and testing services. sector. Russia may be well placed to leverage its Given that the salary costs of IT professionals in skilled manpower to target specific segments in Russia are almost half that of other countries like this market such as fab less chip design, semi- Canada, and Ireland, and lower than in countries conductor packaging, assembly and testing over like the Czech Republic and Israel, which have the near term. successfully positioned themselves as near-shore IT services, for which the market in 2005 was destinations to countries like the U.S. and UK, estimated at USD$1.39 billion, is expected to there appears to be a significant opportunity for grow at around 20% per annum to reach Russia to position itself in this space. The existing USD$2 billion in 2007. With many of the larger competencies of the human resource pool in companies already having implemented pack- Russia together with its geographical location are aged application software (e.g., SAP, Oracle expected to serve as key competitive advantages. Applications), the growth in this segment is Representative offshore activities that can be expected to be driven by packaged software targeted include the following: implementation and system integration require- Packaged application implementation and ments of medium sized-firms in sectors like maintenance through a mix of onsite and food, retail, and real estate. The leading packaged offshore services. application vendors like SAP and Oracle are System integration services. already gearing up to meet this demand by Software application development for various launching their small and medium enterprise industry verticals leveraging existing tools. and application service provider (ASP) versions. IT infrastructure maintenance and support. The packaged software applications market is Select knowledge process outsourcing also expected to increase at 20% per annum to activities like mathematical and econometric reach USD$1.83 billion by 2007. The demand modeling for sectors like financial services. for packaged software is primarily expected from Unlike the high end IT services market proposed companies in high growth sectors such as oil & to be targeted primarily through captive develop- gas, energy, metals, communications, and retail, ment centers, the employment (and turnover) where there is increasing competition leading to potential of this segment is expected to be efficiency pressures. significantly higher, thereby providing domestic IT services companies the opportunity to scale Export Market Opportunities up rapidly. IT export revenues are expected to increase to USD$1.75 billion in 2007, translating to a CAGR 1.4.2.1 role of it parks and proposed of 34%. Based on our assessment, significant business Models opportunities are expected in the following market Based on our assessment of Russia's IT sector and segments. potential growth opportunities, we have attempted to present our assessment of the critical business Leveraging the presence of existing global enablers for developing sustainable IT Parks in majors in IT and telecommunications (e.g., Russia, based on the case studies of IT parks in other Intel, Sun Microsystems , Cadence Systems, countries as well as ground realities in Russia. The Samsung) for continuing the focus on high-end generic critical business enablers that are likely to development activities in the areas of system feature in the expectations of any IT company software development, and wireless technolo- interested in setting up operations in an IT Park in gies. Given that many of these companies are Russia have been highlighted below: 12 International Good Practice for Establishment of Sustainable IT Parks Location of the park in an area that permits it to based on good practice adopted by many countries leverage the existing urban and social infrastruc- have been highlighted below: ture of the three key cities, namely, Moscow, St. Petersburg and Novosibirsk, as availability of the Policy Good Practice for IT Sector Development right quality of human resources is expected to Fiscal Incentives be a problem in any other region. Rationalizing customs duty on hardware vis-à-vis Simplified policy implementation mechanisms components, with simplification of import in terms of single window approval facilities for procedures for attracting global hardware operating licenses; sanction of building plans; companies. and tax and customs duty registrations to cut Providing tax breaks like exemption from export down significantly on the time for setting up taxes for an initial period of five years for new/expansion operations. facilitating increase in exports. High quality physical connectivity and infra- Providing specific fiscal incentives to semi- structure in terms of air (both international & conductor companies, such as: domestic), road and rail connectivity, a combina- Exempting raw materials, equipment tion of multi-tenant buildings with contempo- imported for fabrication, assembly and rary facilities and build-to-suit options, adequate testing from customs duty road and other surface transport connectivity Rationalizing VAT on all semi-conductor with the adjoining city, intra-park roads, products to a lower percentage. sewerage, and electricity. Allowing accelerated depreciation rate for Lease or sale of land for built-to-suit facilities at profit tax purposes (up to two times higher rates lower than those prevailing in the adjoining than the standard statutory rates). city. Innovation Policies State-of-art virtual connectivity in terms of data Providing tax breaks to encourage investments in and voice infrastructure, including international research & development like connectivity. 100% exemptions on customs duty for equipment and goods imported for research The IT Park case studies and primary interactions & development ; with various stakeholders clearly seem to demon- 100% income tax deduction on capital strate a case for management of the IT Parks to be expenditure with respect to scientific vested with private sector players for ensuring research; adequate accountability and efficient service. a refund of any amount exceeding a certain Possibly, as has been the case in many other percentage of VAT paid on sale of software countries, existing facility management companies products, provided it is used for R&D like C B Richard Ellis, and Bovis Lend Lease can be purposes; considered for this purpose. Strengthening enforcement of copyright and patent legislations through creation of a Regarding investments into and ownership of the dedicated tribunal for dealing with disputes on parks, there seem to be a number of private real estate these issues; and companies like Sistema Hals, Rosevro Development, Encouraging quality accreditations (e.g., Leeds Property, and Technopolis with the requisite CMM5, BS7799) by providing incentives or financial wherewithal for developing such projects. grants for reimbursing a part of the expenditure Consequently, a facilitation role is recommended for incurred for obtaining such quality certificates or the government other than in situations where the for filing patents. land is owned by it. In such situations, the govern- ment can possibly pick up an equity stake in the Human Resource Policies development company, given that financial returns Encouraging development of management and on IT parks have been fairly attractive. business aptitude in engineering and other students through establishment of finishing Policy Enablers schools. These schools could be structured as Given that government policies play a pivotal role in public-private partnerships, with infrastructure the development of the IT sector, policy measures being provided by government (in case of Executive Summary 1 inadequate private interest) and course develop- Policy Good Practice for IT Park Development ment and faculty being provided by companies Fiscal Incentives in the IT sector. Providing fiscal incentives to potential IT Park Developing English-language proficiency of the occupants, which are at least at par with the human resource pool through policy interven- existing incentives available to IT companies tions like introducing compulsory English located in Special Economic Zones (Policy education from primary level. reference nos. 116-FZ, 117-FZ, 144-FZ, etc.), Setting up committees comprising both govern- to ensure adequate attractiveness of IT Parks ment officials and IT industry representatives for Providing land owned by government for assessing requirements for changes to existing development and to IT Park occupants at curriculum. subsidized rates, depending on level of employ- Simplifying visa and associated regulations for ment generation. IT professionals from other countries traveling Supporting IT Park developers by subsidizing on business-related purposes rentals for plug and play infrastructure and land Strengthening training infrastructure for meeting lease rates for an initial period (say 3 years), so IT sector manpower requirements through that a part of these subsidies can be passed on to partnerships with global IT training companies. potential occupants, thereby creating a differen- Investment Climate tiation vis-à-vis normal office/commercial Implementing a single-window mechanism for infrastructure. providing all benefits, concessions, and permits Innovation Policies to IT companies. This would require a single Provide incubation facilities and space with agency within government to be identified as world class plug and play infrastructure within the nodal agency, with a presence in all key the technoparks for start-ups and small and mid- cities. This agency would then process applica- sized IT companies at subsidized rentals for the tions seamlessly in coordination with other initial period. ministries. Consolidating the existing policies applicable to Investment Climate Permitting mixed land use in IT Parks by IT companies, together with implementation mechanisms, and communicating them in a earmarking a proportion of the total land for transparent manner to existing and potential IT commercial use (say70%) and residential use sector investors. Possible options include online (say 30%), thereby improving project viability. Extending special concessions to all financial publishing on the Minsvyaz (Ministry of Information Technologies and Communications) entities like banks, financial institutions, venture website with links from websites of industry capital and private equity funds located in the IT associations (e.g., Russoft, Ankit). Necessary Park. Representative concessions/benefits include processes for regular updating of these policies exemption of tax on income on such units for an would also be required. initial period (say 5 years). Implementing a single window mechanism for Extending all the above concessions to local companies, subject to completion of listing on administration of the fiscal concessions and RTS within a pre-defined period and extending benefits, as well as all required statutory approv- additional fiscal benefits on successful listing on als like building plan clearances, environmental international stock exchanges. clearances and fire clearances. Moreover, such Formulating policies for attracting global single window clearance agency should be venture capital and private equity funds like physically present in the Park. Extending all the above concessions to local exemption of tax on income from investments and allowing losses to be deducted from other companies, subject to completion of listing on taxable income. RTS within a pre-defined period and extending Deepening existing capital markets through additional fiscal benefits on successful listing on measures like demutualization, attracting large international stock exchanges. global financial institutions, and investment banks. 1 International Good Practice for Establishment of Sustainable IT Parks 1.4.3 Country Case Study: Jordan Representative outsourcing activities that can be Based on our assessment of the IT sector in Jordan, targeted include the following: the following areas represent potential opportunities Data-based outsourcing activities related to that can possibly be targeted for growth. back-office operations such as accounting, payroll processing, insurance payment/claim Domestic Market Opportunities processing, and internal audit related At present, the industry is mainly dependant on the services. Given that the accounting policies domestic market with exports contributing only and practices followed in Jordan are aligned 20% of the revenues. However, the domestic market to international accounting standards and in Jordan is limited in size, having grown by only Jordan already has a mature financial services USD$260 million during FY 2001­2004. sector, it may have inherent advantages in the According to reports published by Int@j, the domes- area of finance and accounting. tic IT market in Jordan is expected to grow from Voice-based outsourcing activities (e.g., USD$440 million in 2004 to USD$550 million by technical assistance centers, call centers). the end of 2006. The inherent size of the local economy may not be adequate for sustaining growth 1.4.3.1 role of it parks and proposed of an IT sector comprising 160 companies. Despite business Models the government being the principal domestic client Based on our assessment of the IT sector and for the industry, and implementing a number of e- ground realities in Jordan, the generic critical governance projects, growth opportunities for the business enablers likely to feature in the expectations industry appear to be limited. of any IT company interested in setting up opera- tions in an IT Park have been highlighted below: Export Market Opportunities IT export revenues grew at a CAGR of 26% during Location of the park in an area that permits it to FY 2001­FY 2004. Based on our assessment, leverage the existing urban and social infrastruc- significant opportunities are expected in the tures of the capital city of Amman as availability following market segments. of the right quality of human resources is expected to be a problem in any other region. Near-shore BPO service provider for countries Lease or sale of land for build-to-suit facilities at like the U.S. and U.K., given Jordan's geographic rates lower than those prevailing in the adjoining location and with salary costs of IT professionals areas. in the country being comparable with China, High quality physical connectivity and infra- India, Philippines and Thailand and much lower structure in terms of air (both international and than countries like Czech Republic, Hungary, domestic), road and rail connectivity, a combina- and Ireland. tion of multi-tenant buildings with contempo- Given that the salary cost of IT professionals in rary facilities and build-to-suit options, adequate Jordan is lower than in other Middle East road and other surface transport connectivity countries like Saudi Arabia (nearly USD$18,000 with the adjoining city, intra-park roads, per annum) it can position itself as the outsourc- sewerage, electricity, etc. ing destination for the Middle East. Since Jordan State-of-the-art virtual connectivity in terms of shares a common language (Arabic) with other data and voice infrastructure, including interna- countries in the region, it enjoys an added tional connectivity. advantage in providing voice based outsourcing Simplified policy implementation mechanisms in services for the Middle East market. The terms of single window approval facilities in areas outsourcing market in Saudi Arabia, which such as operating license, sanction of building represents one of the largest countries in the plans, and tax and customs duty registrations, so region, is estimated at nearly USD$400 million as to cut down significantly on the time for and is expected to grow at 13% over 2006 to setting up new/expansion operations. 2010. The existing competencies of the human resource pool in Jordan, together with its The IT Park case studies and primary interactions geographical location, are expected to serve as with various stakeholders clearly seem to demonstrate key competitive advantages. a case for management of the IT Parks to be vested Executive Summary 1 with private sector players for ensuring adequate Investment Climate Policies accountability and efficient service. Possibly, as has Implementing a single window mechanism for been the case in many other countries, existing providing all benefits, concessions and permits to facility management companies can be considered for IT companies. This would require a single this purpose. Good practice in other countries clearly agency within government to be identified as the indicate the need for management control of the park nodal agency, with a presence in all key cities, development company to vest with the private sector which would then process applications seam- for higher efficiency and productivity. Consequently, lessly in coordination with other ministries. a facilitation role is recommended for the govern- Extending all the above concessions to local ment other than in situations where the land is companies, subject to completion of listing on owned by it. In such situations, the government can Amman Stock Exchange within a pre-defined possibly pick up an equity stake in the development period and extending additional fiscal benefits on company, given that financial returns on IT parks successful listing on international stock exchanges. have been fairly attractive. Supporting listing of IT companies on Amman Stock Exchange through measures such as lower 1.4.3.2 policy enablers threshold of paid up capital requirements and Given that government policies play a pivotal role reimbursing initial listing fees. in development of the IT sector, policy measures Formulating policies for attracting global venture based on good practice adopted by many countries capital and private equity funds like exemption of covered under our study are highlighted below. The taxes on income from investments, and allowing government of Jordan may consider these for losses to be deducted from other taxable income. implementation: Policy Good Practice for it Park Development Policy Good Practice for it Sector Development Fiscal Incentives Fiscal Incentives Providing incremental fiscal incentives to Allowing local IT companies duty free import of potential IT Park occupants like corporate tax capital goods for use in IT and BPO Services holidays for an initial period (say 5 years). exports. Providing land owned by government for Providing fiscal incentives like import duty development and to IT Park occupants at exemptions on capital equipment; investment subsidized rates, depending on level of employ- subsidies to private telecom companies on ment generation. investments made in augmenting international Supporting IT Park developers by subsidizing data connectivity, initially with a focus on the rentals for plug and play infrastructure and land Middle East, followed by Europe and U.S. lease rates for an initial period (say 3 years), so Human Resource Policies that a part of these subsidies can be passed on to Establishing finishing schools through public- potential occupants, thereby creating a differen- private partnership to train students in manage- tiation vis-à-vis normal office/commercial rial and business aptitude, with the infrastructure infrastructure. being provided by government and curriculum Innovation Policies and faculty being provided by IT companies. Provide incubation facilities and space with Constituting a committee comprising of world class plug and play infrastructure within government officials and IT company represen- the IT parks to start-ups and small and mid- tatives to assess the existing curriculum for sized IT companies at subsidized rentals for the specific courses, based on requirements of IT initial period. companies. Providing fiscal incentives like tax breaks on Investment Climate employee training costs to companies . Permitting mixed land use in IT Parks by Encouraging local universities to increase intake allowing a proportion of the total land for other of students in finance and accounting, and land uses like commercial, institutional and motivating students to pursue this area through residential, which fetches greater returns and thus targeted financial support improves the financial viability of the project. 1 International Good Practice for Establishment of Sustainable IT Parks Implementing a single window mechanism for Extending all the above concessions to local fiscal concessions and benefits, as well as all companies, subject to completion of listing on required statutory approvals, with a physical the local stock exchange within a pre-defined presence in the Park. period and extending additional fiscal benefits on successful listing on international stock exchanges. Executive Summary 1 18 International Good Practice for Establishment of Sustainable IT Parks Chapter 2 It Sector: alternate development Models 2.1. The Importance of ICT in ICT goods Electronic Data Processing (EDP) and office Development equipment Telecommunications equipment The contribution of the Information and Integrated circuits and electronic components Communication Technology (ICT) sector to socio- ICT Services economic development is well acknowledged. A Information Technology (IT) Services such number of studies conducted by the United Nations as system integration, software development Conference on Trade and Development (UNCTAD) and maintenance, network infrastructure and other development agencies have clearly management, IT application outsourcing, established the close linkage between usage of ICT and packaged software support and macro-economic growth across various coun- Business process outsourcing (BPO) services tries. The key constituents of this linkage include: in the areas of customer care and support, finance and accounting, human resources, Contribution of the ICT sector to the Gross content development, etc. Domestic Product of the country through economic activity and trade. It should be noted that while communication- ICT usage by citizens which results in a more related software and product development are informed and connected society with global included under ICT services, telecommunication expectations. services like landline and mobile phone services have ICT deployment by government for enabling been excluded from the current analysis. efficient service delivery, improving transparency Consequently, the term Information Technology and effective monitoring. (IT) has been used in lieu of ICT for the remaining Businesses leveraging ICT to bring about part of the report. changes to core business processes like supply chain a logistics, thereby augmenting operational efficiencies. 2.2. The Global IT Sector As is evident from the above, the importance of ICT primarily stems from its ability to be used as a Given the differences in classification and deficient tool to bring about improvements in efficiency. information-collation mechanisms in different Consequently, while use of ICT is easy to identify, countries, it is extremely difficult to accurately assess sizing of the sector is relatively difficult as, unlike a global IT sector revenues. Nevertheless, global IT conventional sector, a significant portion of the sector turnover was estimated at around USD$1,700 value added would originate from firms (e.g., banks, billion during 20041. manufacturing companies) which may not be within the sector. Before going forward, it is While information on domestic IT sector revenues therefore important to clearly delineate the different are impacted by inconsistencies in definitions and components of the ICT sector. Based on an analysis deficient information-collection mechanisms, of different existing classification systems (e.g., another key parameter that can be used for NACE, OECD, SIC) the ICT sector has been categorized into the following for purposes of the 1 united nations conference on trade and Development (unc- current analysis: tAD) information economy report 2005 Sector: Alternate Development Models 19 assessing the performance of the sector is the value to Korea. However, Korean EDP and office of trade in IT goods and services between different equipment exports to China were worth countries. around USD$6 billion. Significant trade flows also exist between the United States, As per the International Trade Statistics, 2005, Canada, European Union, and Mexico, with collated by the World Trade Organization, aggregate aggregate U.S. exports to these countries global exports of IT goods and services was around being around USD$27 billion. USD$1213 billion during 2004, with services Telecommunications equipment exports accounting for around 7% of aggregate exports. An from Mexico, China and Japan to the United analysis of the trade statistics reveals the following: States aggregated $18 billion, USD$17 billion and USD$10 billion respectively. The The 5 largest IT goods exporters included the EU represented another major market, with European Union (EU) (28% of global IT goods telecommunication equipment exports from exports), China (23%), United States (11%), China, Japan, Korea being of the order of Japan (9%) and Singapore (8%). USD$15 billion, USD$11 billion and EDP and office equipment exports accounted for USD$9 billion respectively. Within Asia, around 37% of total IT goods exports, followed China and Korea are the dominant players by telecommunication equipment (34%) and catering to most of the regional demand for integrated circuits & components (29%). telecommunication equipment. Korea had the largest trade surpluses in IT goods The United States is one of the largest at USD$47 billion, followed by Japan (USD$38 exporters of integrated circuits and electronic billion) and Singapore (USD$24 billion). China, components globally, with exports of United States, and the EU emerged as net USD$49 billion to the EU (USD$5 billion), importers of IT goods (please refer to Figure 1 Mexico (USD$6.5 billion), Korea (USD $4.6 below for details). billion), China (USD$3 billion) and Japan Significant regional trade flows have been (USD$2.4 billion). It is closely followed by discussed below. Singapore with exports of USD$47 billion, EDP and office equipment exports from which caters largely to the requirements of China to the EU and United States were the EU, China, Japan, and Malaysia. around USD$22 billion and USD$24 billion respectively. Within Asia, China was the Based on an analysis of trade flows, countries like single largest exporter, with exports of China, Korea, Malaysia and Singapore appear to be USD$9 billion to Japan and USD$2 billion significant players in EDP and office equipment. South Korea and Japan are the global leaders in telecommunication equipment, while the United States, Singapore and Japan enjoy global leadership in integrated circuits and electronic components. Figure 1. Key Players ­ IT Goods While the EU contributed significantly to global Trade, 2004 trade flows, around 70% of its exports and 50% of imports are from/to countries within the Union. The other key trading partners of countries within 500 the EU include the United States and China. 400 397 Within the EU, exporters of ICT goods primarily 317 include countries like the United Kingdom, 300 Germany, Ireland, and the Netherlands, which have 213 226 200 established IT goods manufacturing facilities. Key 174 121 importing countries within the EU include 102 86 100 64 83 63 56 Luxembourg and Spain. 35 39 57 37 0 As per the existing classification system followed by Exports Imports the World Trade Organization, IT services are Source : WTO Trade Statistics, 2004 and PwC analysis. categorized under other commercial services. Total 20 International Good Practice for Establishment of Sustainable IT Parks Figure 2. Key ICT Indicators for Different Countries, 2004 united parameters Korea Malaysia china india States Japan Germany Singapore Social indicators total Population (millions) 48 25 1296 1080 294 128 83 4 Urban Population (%of total 81 64 40 29 80 66 88 100 population) ict Sector indicators Access: telephone lines (per 1000) 467 176 241 43 606 531 660 430 Internet users (per 1000) 656 392 73 23 569 606 472 559 Personal computers (per 1000) 558 170 40 11 760 425 440 565 Mobile Subscriber (per 1000) 760 573 258 48 615 669 858 891 Population covered by mobile 99 96 73 41 95 99 99 100 telephony (%) Quality: Broadband subscribers 247.6 10 16.5 0.6 129.1 145.8 83.6 118.2 (per 1000) International Internet Bandwidth 993 127 57 4 3308 1038 6850 5699 (bits/person) Affordability: Price basket for fixed line (US$/month) 7.3 8.7 3.6 3.2 25 26 17.5 6.7 Price basket for mobile (US$/month) 2.1 5.6 3.7 3.2 10.8 29.1 30.6 5.7 Price basket for internet (US$/month) 9.7 8.4 10.1 8.7 15 21.1 14.1 11 ICtexpenditure (% of gdP) 6.6 6.9 5.3 3.7 8.8 7.4 5.7 10.4 Source: World Bank, UndP, ItU and others. exports of other commercial services were estimated United Kingdom, Germany, and Japan, which were at around USD$750 billion during 2004. early starters and have already made significant Assuming the share of IT Services at 2003 levels of progress in ICT access and quality have well- 8%, total IT Services exports would be around developed domestic IT goods and services markets USD$60 billion. However, there is a possibility and are currently more focused on research and that specific areas like BPO services may have been development. Their exports primarily comprise classified under other business services, which high-end products like specialized integrated constitutes a significant part of other commercial circuits, chips, and system software. Then come services. countries like Korea and Singapore, which also have mature ICT markets and have assumed the role of Other than the United States, Germany, United prominent hardware manufacturers capable of Kingdom, China, and Korea, which also have a manufacturing key components such as LCDs, significant domestic IT services market and are key CRTs, and DRAM and replenishing new peripherals players in IT goods exports, the market leaders in and devices as the market progresses. The third tier global IT services exports include countries like includes countries such as China, Malaysia, and India, Ireland, and Canada, which have limited India, which generally started focusing on the IT contribution to global IT goods trade flows. sector during the mid to late nineties. They have However, the IT services exports of these players is successfully leveraged their cost advantages to significantly more than countries such as China and emerge as assembly bases for computer hardware, Korea. manufacturers of standardized peripherals, etc. or as in the case of India, developers of application The level of maturity of the ICT industry in software, and providers of IT and BPO services. A individual countries is also a key determinant of its comparison of key ICT development indicators for relative positioning in IT goods and services. representative countries in each of the three tiers has Consequently, countries like the United States, been presented in Figure 2 above. Sector: Alternate Development Models 21 2. Science & Technology Technopolis in Korea, IT Park in India) and models of development may have been different, the Parks in the IT Sector: underlying principle has been common, namely to A Global Phenomenon seek synergy and exploit advantages through net- working of different market participants such as IT Innovation has been one of the primary drivers of companies, universities, and research & development economic development across different countries. It institutes, and infrastructure service providers. has been at the core of new business opportunities in a world that is rapidly shifting from resource-based One of the earliest initiatives in IT Park development economies to those that are focused on the manage- was undertaken in the United States more than 50 ment and application of knowledge. Innovation, years ago, when a Science Park was created within the more than the application of labor and capital, has Stanford University campus. Historically, Science been the major driver of knowledge economies. It Parks in the U.S. were established by universities to accounts for more than half of all growth in modern complement academic programs and generate economies. While industries built on leading-edge additional revenue, leveraging their academic technologies such as IT, biotechnology, and engi- enterprise and research capabilities, land resources, neering are often seen as characteristic of a knowl- and encouraging greater academic entrepreneurship edge intensive economy, innovation has the potential (Source: Y. Zhang, 2005). Besides Science Parks to transform almost all industry sectors. being established in the academia environment, IT clusters also developed with organizations establish- Science and Technology Parks, typically involving ing mutual linkages amongst themselves. The Silicon tertiary institutions or other research organizations, Valley is an example of one of the highly acclaimed have become an established part of the innovation IT habitats in the world that has inspired the setting infrastructure in many economies. They represent an of IT Park all across the world. economic development tool that is particularly suited to developing regional knowledge economies. In appropriate regional environments, these parks have been found to provide a specialist mechanism 2. Developing Economies, to promote and stimulate commercial and industrial the IT Sector and IT Parks innovation, encourage re-industrialization, and foster sustainable regional development infrastruc- Developing countries are increasingly looking ture options. towards the IT sector for accelerating their eco- nomic growth. Two countries that have made signifi- Within the broad tapestry of economic development cant progress in this sector are China and India. The tools, the special and unique role that science and importance of the IT sector can be brought out by technology parks usually perform is to: analyzing the sector's contribution to GDP and exports, along with the rate of growth of the Recruit and co-locate new and established industry as compared to growth in GDP. The IT knowledge-based companies; sector has over time become a significant contribu- Promote innovation based on `smart' technologies; tor to their economies. IT industry's share in the Provide an interface or shared research environ- Indian GDP was 1.2% in FY2000 which increased ment for research organizations and private to 4.8% in FY2006. In China, the sector's contribu- industry; and tion to the GDP was around 4% for the period Leverage local knowledge resources to enhance a 1996­2000, which further increased to 5­7% for region's economic base. the period 2001­2005. Given the high innovation content in the IT sector, it IT exports have grown at a rapid rate for both these is therefore not surprising that most of the successful countries. According to OECD data2, China today countries in the sector have focused on setting up science and technology parks for developing the 2 oecD report on china ict exports in 2004" Available at: sector. While the nomenclature (for example, Science http://www.oecd.org/document/8/0,2340,en_2649_201185_ Park in the United States, Europe, and Singapore; 35833096_1_1_1_1,00.html. August, 2006 22 International Good Practice for Establishment of Sustainable IT Parks is one of the largest exporter of ICT goods with The developing countries have increasingly relied exports of around USD$180 billion. China's share on IT parks as a preferred tool for promotion of IT of world trade in ICT goods reached USD$400 industry. These countries are often constrained by billion in 2004 as compared to USD$35 billion in severe infrastructure limitations. It is easier to 1996, a growth rate of around 38% for this period. provide world class infrastructure in select areas. According to Information Technology Annual The developing countries like India and China have Report 2006 published by the Department of concentrated state-of-the art physical, communica- Information Technology, Government of India, the tion and social infrastructure in IT parks to enable software and IT-Enabled Services ( ITES) exports IT companies to operate. On the other hand, from India increased from USD$6.3 billion in developed countries like Korea, Japan, and others FY2001 to 17.7 billion in FY2005, the CAGR are often driven by the need to develop new being 28% for this period. It is expected that the technologies through networking between compa- exports will grow by 32% in FY2006. The growth of nies, research and development institutes, and the IT sector is outpacing the growth in the centers of excellence. country's GDP for India and China. The Indian IT sector has grown at the CAGR of 28% for the last The ownership and operating models for IT Parks five years (2000­2005) whereas the GDP growth have also been varied. While government ownership rate during this period has been in the range of 6­ (usually the Ministry of Science and Technology) and 8%.Similarly in China, ICT sector's annual growth management has been the dominant trend during rate has exceeded 20% for the period between the initial period of development, most developed 2001­2006, whereas the GDP has grown between countries today have well-established networks for 8­10% for this period. private promotion and management of IT Parks. The global market for offshore services is expected to Unlike other industrial clusters, IT parks are not increase from USD$81 billion in 2005 to USD$252 constrained by factors such as the availability of billion in 2010,with the market size for IT Services natural resources, or raw materials. The key resource estimated at USD$93.1 billion, Knowledge Process requirement is availability of quality manpower. Outsourcing (KPO) services at USD$31 billion, One of the main reasons for the success of China R&D & engineering services at USD$19 billion, and India in the IT sector can be attributed to their Business Process Outsourcing (BPO) services highly educated and skilled manpower. It has been comprising back-end transaction processing services observed that IT parks generate spillover effects, at USD$60 billion and contact centers at USD11.4 leading to a virtuous cycle of local economic billion. (Source: Gartner, IDC, Neo-IT, A.T. development. IT park development helps generate Kearney Research). The key drivers for the expected impetus to local development of industries such as growth in offshore services will be availability of low real estate, retail, and lifestyle and recreation. cost qualified manpower, in addition to having access to world-class communication facilities. Despite all these differences, IT Parks have been Developing countries are expected to leverage such found to be an inseparable part of IT sector develop- offshore market opportunities to develop their IT ment and need to be carefully assessed to bring out services sector, which is expected to play a significant good practice that can then be applied in the context role in generating employment opportunities and of countries aspiring to make their presence felt in economic growth. the IT sector. Sector: Alternate Development Models 23 2 International Good Practice for Establishment of Sustainable IT Parks Chapter 3 It Parks: What Has Worked and What Has not .1. Evolution of Science and or industry specific character and ii) Issues like intellectual property protection, promoting local Technology Parks enterprises for regional development, establishing backward and forward linkages became increasingly The United States and select countries in Europe important and many existing parks reoriented their were the first to set up dedicated Science Parks business models to provide these services. The role during the sixties. Unlike the sector-specific parks in of the non-government sector in park management vogue today, many of these parks were set up to also increased as many of these services were of a cater to the requirements of multiple knowledge or specialized nature. Simultaneously, with most of technology intensive sectors such as engineering, the sectors achieving self-sustainability, the role of chemicals, and electronics. In Asia, the phenomena the government became primarily that of a of setting up dedicated parks to enable knowledge facilitator and regulator from that of an investor sharing started in the early seventies, with countries and driver. like Japan and Korea taking the lead. However, many of these Parks primarily had government Current science and technology parks can therefore research and development institutes and universities be categorized into two types, namely i) Horizontal as occupants, with limited representation from non- parks straddling a number of sectors and ii) Sector- government business ventures. Consequently, the specific parks in knowledge/technology intensive focus continued to be on basic research and areas. converting research outputs to product prototypes, which could then be taken up for commercial purposes. .2 Our Approach It was only in the late seventies and early eighties that the non-government sector started to play a role The first step in the assessment included identifying in this sector. The trend started with a number of five countries for further analysis, based on an assess- applied research and development organizations ment of the relative competitive positioning of promoted by private businesses setting up operations individual countries as detailed in the previous in the park to avail the benefits of government section. Given the relatively higher focus of the support to research and development. This gradually current study on developing countries, 3 developing gave way to manufacturing facilities being set up in countries were included in the final sample in designated areas of the park and ultimately, a addition to 2 developed countries. substantial portion or the entire operations of the business venture getting relocated to the park. By Next, a total of 6 IT Parks were identified across this time, with markets opening up, international these countries so as to constitute a representative trade flows and inter-regional technology transfer sample covering both i) successful and not-so- arrangements also started to impact knowledge or successful IT Parks and ii) IT goods as well as IT technology intensive sectors in particular. and BPO services. As a first step, an attempt was made to understand the relative performance of The resultant impact on science or technology individual IT Parks through key parameters like parks was two-fold, namely i) With individual number of occupants vis-à-vis years of operation, sectors achieving critical mass and becoming more nature and credibility of occupants, and relative specialized, many parks started acquiring a sector importance in the country's IT sector. IT Parks: What Has Worked and What Has Not 25 3.2.1 The CLIP Framework of Analysis Figure 3. The CLIP Framework The individual dimensions of the CLIP framework, namely, Capital, Linkages, infrastructure and People Capital were then used for assessing individual IT parks. The individual parameters of the framework have been explained below. Sources of Debt Ownership Capital attempts to assess i) Investment, Anchor ownership, and management-related issues of the Private Equity/ Venture Capital Occupants IT Park in terms of how it has been funded, role of the government and the private sector; ii) Mix Business of anchor occupants and early stage companies Incubator in the park, and iii) Provision of business incuba- tion services by the park management and availability of private equity/venture capital and other means of financing. Linkages Linkages include i) Nature of products & services offered by key occupants and their fit with the target markets; ii) Assessment of Market Value Chain forward & backward linkages of key occupants of the park; iii) Relationships between key occupants and resource organizations such as Internal Centers of academic institutions and R&D centers, given Services Excellence the nature of products & services offered by key occupants; and iv) Value-added services offered in terms of market access, business planning and operational support, developing appropriate linkages within and outside the Infrastructure park, etc. infrastructure addresses i) Availability and relative cost of land/space; ii) Quality of physical Land Physical infrastructure in terms of connectivity, urban Infrastructure infrastructure, etc.; iii) Nature of social infra- structure such as recreational facilities, and Communication Social remoteness ; iv) political stability and law & Infrastructure Infrastructure order and v) Intra-park, domestic and interna- Environment tional data and voice connectivity. People issues in terms of i) Quality of educa- tional institutes; ii) Annual employee salaries and benefit levels and iii) Availability of people both in terms of numbers and skill-sets. People . Taedok Valley, Taejon, Quality Salary Korea 3.3.1 Background Throughput Taedok Valley is located about 150 km south of Seoul and represents one of the first science & technology parks in Korea. The development of the valley started in 1973­74 with the construc- 2 International Good Practice for Establishment of Sustainable IT Parks tion of Taedok Science Town (TST) by the 3.3.2 Applying the CLIP Framework to Ministry of Science and Technology, government Taedok Valley of Korea, as part of an effort to overcome the Capital: The estimated total investment in Taedok increasing population (and consequently infra- Valley was USD$ 4.8 billion, out of which around structure) pressures on Seoul and develop ad- 50% represented investments in industrial units/ ditional centers of innovation and growth. The clusters and private sector R&D institutes. The overall objective of TST was to foster closer links balance was funded by the Ministry of Science and among research institutes, academia, and industry Technology, government of Korea. In line with through the effective placement of government government policy trends in Korea, the park is supported research institutes. The site was strategi- managed by Taedok Science Town Administration cally selected so as to be close to the city of Taejon, Office (TAO), which is an arm of the Ministry of one of the largest cities of Korea and the headquar- Science and Technology. The key functions of TAO ters of the Korean Armed Forces. The development include effective utilization & management of land of Taedok Valley took place over a period of 20 in line with regulatory guidelines, preserving the years and included the following major mile- green zone and natural landscape and providing stones3: effective support to the occupant organizations. 197­74: Basic planning and commencement of More than 800 companies operate out of Taedok construction of Taedok Science Town, compris- Valley, with around 45% being in the IT sector, ing research & educational facilities, residential 20% in biotechnology and the others focusing on zone, commercial zone (for industrial enter- areas such as chemicals and plastics. There are prises) and green or open zone. around 3 companies with annual revenues of over 1977: Announcement of Taedok Industrial Base USD$30 million and another 5 companies with Development Area comprising 2 Industrial Parks revenues exceeding USD$11 million. It also houses supported by the research & development 399 research institutes, 21 public institutes, and 24 (R&D) institutes in Taedok Science Town. universities. Venture capital support is provided 1978: Commencement of relocation of key through the Taedok Angel Mart and a dedicated government research & development institutes venture capital fund, with cumulative investments such as the Korea Advanced Institute of having exceeded USD$20 million. However, a Science and Technology (KAIST) and number of large Korean conglomerates such as LG Electronics and Telecommunication Research and Daelim have dedicated R&D facilities in the Institute (ETRI). Science Town and serve as anchor occupants. 1983: Merging of Taedok Science Town with Taejon City. Linkages: The focus of IT sector occupants is 1990­98: Completion of phased relocation of primarily on areas such as basic and advanced government supported R&D and academic telecommunications technology, telecommunication institutes; Commencement of Science Expo network operating technology, and data communi- facilities and first exhibition in 1993; Passing of cations, in line with the relative competitive the Taedok Science Town (TST) strengths of South Korea. Most of the units cater to Administration Act in 1993 designating the domestic and export markets. R&D support is Taedok Science Town Administration Office available from the government-promoted Electronics (TAO), Ministry of Science and Technology as and Telecommunications Research Institute(ETRI), the nodal agency for administration & manage- as well as private R&D institutes set up by entities ment; Setting up of R&D facilities by large such as Dacom and Korea Telecom. The park also private sector players such as LG, Hanwha, has an international intellectual property training Shinsung, and Dacom. institute which supports capability development in 1999­2004: Reform of the TST Administration this area. There are around 23 business incubator Act in 1999 with a focus on R&D commercial- centers, which offer marketing and sales support ization promotion, setting up of business ventures; Patent Court relocated to Taedok in 3 chungnam Development institute, "the growth of Daedeok 2000; Special law for Taedok R&D Special Zone Valley and r&D special zone plan" 2005. (http://www.rieti. in 2004 go.jp/users/cluster-seminar/pdf/015_e.pdf) IT Parks: What Has Worked and What Has Not 27 through focused technology transfer fairs and other institutes, is one of the essential factors for facilitat- events. ing innovation through development of new product and services. IT Parks, which focus on R&D, should infrastructure: Spread over an area of over 6,800 be developed in proximity to good academic or acres, Taedok Valley includes a i) residential zone, R&D institutes and/or should be housed in the ii) commercial zone housing the industrial parks, campuses/neighborhood of such institutes. iii) research & educational zone and iv) a green or environment-friendly zone. The cultural and social amenities include convention & concert halls, a sports complex, swimming pool, and athletic parks. . Zhongguancun Science The Valley is about 30 minutes from the Cheon Gju Park (ZSP), China International Airport and is also well connected domestically through 3 major highways and 2 railway networks. Data and voice connectivity is 3.4.1 Background Zhongguancun Science Park (ZSP) is located in the provided by Korea Telecommunication Authority, northwest of Beijing, about 15km from Tiananmen which also has a dedicated international gateway in Square. Zhongguancun, in the Haidian District, was the region. There are around 13 buildings identified selected by Chen Chun Xian, a nuclear physicist, as for business ventures, which are offered at dis- the location for the first non state-owned science & counted rents to occupants. technology company in 1980. By 1986, it was home to more than 100 non-state owned S&T companies, People: In line with the focus of Taedok Valley, the with its main street acquiring the name of total number of scientists and researchers deployed "Zhongguancun Electronic Street". In May 1988, in the research institutes, government institutes, the State Council approved the setting up of the universities, and businesses is estimated at over Beijing Experimental Zone in Haidian, which 25,000. There are 3 higher education institutions marked the formal development of ZSP. within the Valley, namely Korea Advanced Institute of Science and Technology (KAIST), the Chungnam The objectives for establishing ZSP are three-fold; National University and Chungnam college, all of (i) economic development through the promotion which are government promoted, with a cumulative of hi-tech industries, (ii) employment generation, throughput of over 30,000 highly qualified re- and (iii) creation of a base for innovation in the sources. Around 3,300 patent applications origi- field of science and technology. nated from the Valley during 2001, translating to a ratio of 23.2 patents per 10,000 persons. The park has been in existence for the last 18 years and has achieved the following milestones during 3.3.3 Key Lessons the course of its journey to becoming one of the Considering that the primary objective of TST was largest science and technology parks in China4. encouraging innovation through fostering linkages among research institutes, academia, and industry, 1991: Beijing Shangdi Information Industry set the park appears to have attained a degree of up as the first incubator in ZSP. success as is evident from the profile of its oc- 1992: Fengtai Science & Technology Park and cupants. TST's success in innovation can be Changping Science & Technology Park were measured by patents generated from the park, established. which was 23.2 patents per 10,000 people in 2001, 1994: ZSP was classified as a single zone as compared to the national average of around 7 including multiple parks. patents per 10,000 people. The R&D investment 1997: ZSP sponsored the first annual in the Park for year 2002 was $1,997.7 billion Zhongguancun Computer Fair and it also (2.1 billion USD), which was 12.4% of the total became the first group network member of national R&D investment. APEC Science Parks. The key lesson from the TST case study is that good 4 Xiaomin, Wang. "Zhongguancun Science park: A SWot linkages amongst park occupants, like industry, Analysis", Visiting researchers series no. 10(2000), institute of academic institutes and research & development Southeast Asian Studies, May 2000 28 International Good Practice for Establishment of Sustainable IT Parks 1998: The Overseas Students Pioneer Park was managed by the Beijing Municipal government and established within ZSP. loan arrangements with commercial banks, these 1999: The State Council approved "Request for companies find it difficult to mobilize resources as instruction on actualizing the strategy of there is a pronounced policy preference towards the flourishing country by science and education, larger companies. and accelerating the construction of ZSP", thereby leading to the constitution of the current Linkages: Companies in ZSP account for over 40% ZSP Management Committee, which was of the total software and IT services sales in China, subsequently vested with the powers of munici- primarily due to large companies like the Stone pal economic administration in the park. Group (80% share of the Chinese word processing 1999: Three companies, namely, Beijing Science market), Founder Group (market leaders in Chinese Park Construction Co Ltd, Beijing Science Park electronic publishing), Legend, Taiji, Nantian Bidding Co Ltd, Beijing Zhongguancun Science (leading system integrators). It also has companies Guarantee Co. Ltd. were established to speed up like the Legend Group, which is not only competing the construction of facilities within ZSP. for domestic market leadership but also features in the top 5 exporters of PC mother boards and add- 3.4.2 Applying the CLIP Framework to on cards. Many of these firms have benefited Zhongguancun Science Park significantly from their association with universities/ Capital: From its inception in 1988, the government centers of learning like Beijing University and has been funding facilities development in ZSP. The Tsinghua University, and research institutions park is managed by the ZSP Management located in this area. Committee, which comprises nominated members of different government bodies (e.g., municipal In ZSP, 39 institutions of higher education under management committee, different municipal Beijing University and Tsinghua University are departments). The major services offered by the park present. There are 213 national scientific institutions management committee include land use and and laboratories represented by the Chinese facilities planning, investment services, labor Academy of Science and Chinese Academy of management, business services, and environmental Engineering present in ZSP which have excellent protection. linkages with the companies located in this park. The presence of R&D centers and the research The occupants of ZSP primarily include IT compa- institutes has lead to more than thousand sophisti- nies (68% of total number of companies), optics- cated discoveries from this park. machinery-electronics integration companies (10%), and new materials, new energy and environmental infrastructure: By virtue of its location, the park is protection companies (12%). According to the 2004 able to leverage Beijing's extensive road and rail Beijing Statistical Handbook, there are more than connectivity, urban infrastructure, social infrastruc- 12,000 enterprises across ZSP's seven parks. ture and amenities. It uses optical fibre for internal However, only 10­20 companies, such as the Stone data connectivity, backed up by international Group Corp., Legend Group Corp., and BD gateways in Beijing. Voice connectivity is provided Founder Group, which are market leaders in their by China Telecom. Over time, there have been respective fields, have revenues over USD$200 concerns on increasing land prices and property million, with another 100 companies managing to rentals. Land is owned by the government and cross USD$10­20 million in revenues. Around 20% leased out to the occupants. Typical lease period is of companies represent joint ventures with invest- 70 years. ment from countries such as the United States and Japan. There are also around 1,500 R&D centers People: Haidian district is home to 68 universities and hi-tech companies set up by global companies and colleges that produce high quality graduates for such as Microsoft, IBM, Intel, Sun Microsystems, ZSP. Haidian is an educationally advanced district, and Mitsubishi. The balance includes small compa- with over 25% of the population having received nies and start-ups which are involved in trading or higher education. In ZSP, 39 universities are located copying media. Despite the existence of domestic including Peking University and Tsinghua venture capital funds of over USD$150 million University with a total of student population of IT Parks: What Has Worked and What Has Not 29 400,000. From these universities around 100,000 213 research institutes including Tsinghua students graduate each year. University, Peking University and the Chinese Academy of Sciences. Leveraging this proximity The quality of manpower at ZSP is also quite high, with academic institutions, the government, has as is evident from the over 55% university degree established a useful platform for attracting and holders, 36% bachelors' degree holders and 19% training innovative talents. This includes Masters' degree holders or PhDs. ZSP enjoys close providing specialized incubator services aimed at proximity with the prestigious Qinghua University, returning overseas Chinese students which have Beijing University and the Chinese Academy of resulted in over 450 start-up IT organizations. Science. Around 3,218 patents were applied for from ZSP in 2004. The park also has a set of policies for encouraging overseas students and professionals to set up their own enterprises in ZSP. In 2004, over .. Hitec City, Hyderabad, 5800 returned overseas Chinese students and India scholars have started their own enterprise in ZSP. During 2003, more than 83,000 new jobs were 3.5.1 Background created in ZSP with the total staff employed The Hyderabad Information Technology Engineering reaching around 489,000. Currently, it is estimated Consultancy (Hitec) City is located in Hyderabad, that around 650,000 persons are employed in ZSP. the capital of the state of Andhra Pradesh and one of The average annual salary of IT professionals at the the fastest growing cities in India. As per the Census middle management level is around USD$10,000 to of India, 2001, Hyderabad was the sixth largest city $12,000. in India with a population of 5.5 million. Andhra Pradesh was relatively a late starter among the Indian 3.4.3 Key Lessons states with respect to IT sector development. The ZSP is the pioneer of Chinese Science Parks and is government of Andhra Pradesh (GoAP) wanted to also the largest, with an average annual growth of create an enabling IT sector environment in 20­30% over the last 10 years. ZSP contributes Hyderabad with an objective to attract large around 60% of the annual industrial growth of domestic and foreign IT companies to locate in the Beijing, with its business income accounting for city and generate employment in the state. Moreover, 18% of the total income of all 53 Chinese hi-tech GoAP wanted to position Hyderabad as the knowl- parks in 2001. Today, ZSP is considered to be a edge hub of India. Hitec city was the first step model for other science parks in China to replicate. towards fulfilling GoAP's objectives. Key factors that contributed to the success of the Hitec City is located in the northwestern part of the park have been detailed below: city and is around 350 acres in area. Key milestones in the development cycle of Hitec City include: Attractive fiscal incentives provided by the government to firms located in ZSP, including November 1998: Construction of Cyber Towers, additional tax waivers, income tax benefits on the first multi-occupant 10 story building with expenses related to R&D activities, technology four quadrants or zones, spread across 6 acres of transfers and technology consulting. These incentives along with availability of world-class infrastructure within the Park have attracted well-known domestic enterprises (e.g., Lenovo Group, Stone, Founder Group) to operate from ZSP as well as many Fortune 500 companies (e.. g., Nokia, HP, Microsoft, Oracle) for setting up R&D institutions in the park. Attracting academic institutes in and around the park and establishing industry--academic linkages also helps. ZSP is well placed in terms of its proximity to academic and research institu- tions, surrounded by 39 leading universities and 0 International Good Practice for Establishment of Sustainable IT Parks Box 1. Cyber Towers ­ Multi Occupant Model Cyber towers was developed as the signature building of Hitec City by l&t Infocity, a joint venture between larsen & toubro ltd (l&t), one of the leading engineering companies in India and aPIIC. While l&t held 89% stake in the company, aPIIC's stake was 11%. While aPIIC provided the land for development, l&t was responsible for construction of the facility, marketing of the space and facility management & maintenance. l&t Infocity also developed other facilities within Hitec City such as internal roads, sewer- age system, and optical fibre network for data and voice communication. Cyber towers was conceived as a 10-story building with around 0.6 million square feet build-up area. the construction of Cyber tower was completed within 14 months of allotment of land and it was fully occupied within 4 months of construction. around USd$28 million was invested for construction of Cyber towers. the main revenue streams for the developers included i) selling of the floor space, ii) leasing out of the floor space, iii) leasing out of car parking space and iv) maintenance charges. It is understood that l&t Infocity achieved break even within 4 years of construction. the built-up space has been sold to financial institutions such as Housing and development Finance Corporation (HdFC) and ICICI Bank and to It companies like Keane, at rates of around USd$33/sq ft. the current selling price is around USd$67/sq ft. Initially, the lease rentals for anchor investors like Micro- soft India (r&d) limited and oracle ranged between USd$0.44 to 0.55/sq. ft/month. Subsequently, the rates increased to around USd$0.77/sq.ft/month for unfurnished space and USd $1.55/sq. ft/month for furnished space. Currently 60% of the space is on rent and 40% of the space has been sold. all occupants pay USd$0.1/sq. ft. as service and maintenance charges to l&t Infocity. the services provided by l&t Infocity include backup power supply, air-conditioning facility, waste disposal & treatment, internal security system and parking facilities. oc- cupants of the facility include eateries, courier service providers, banks and telecom service providers which meet the requirements of It and BPo companies. (Based on interactions with Mr. r. Sridaran, Chief operating officer, l&t Infocity) land, with a total built-up area of around January, 2006: Inauguration of the Hyderabad 580,000 sq. ft. Cyber Towers was constructed in International Convention Center, spread over 15 14 months and achieved 100% occupancy acres of land, with over 291,000 sq. ft. of within 4 months of completion. meeting space capable of accommodating over 2002: Completion of Cyber Gateway or Phase II 5,000 delegates and a conference complex of Hitec City, a multi-occupant trapezoidal comprising break-out rooms with state-of-art structure, spread over 8 acres of land, with a total automation and audio-visual facilities. The built-up area of around 866,000 sq. ft5. It offers complex also includes a 287 room business ready to use space with plug & play facilities, hotel, operated by Novotel. ranging from 1700 sq. ft. to 36,000 sq. ft. or multiples thereof, depending on the occupant's An estimated 5,000 acres of land adjoining Hitec requirements. City, comprising campuses of large IT companies 2003: Completion of the Hitex Exhibition such as CMC, TCS and Microsoft and residential Center within the park, for hosting internal blocks is currently in an advanced stage of develop- exhibitions, trade shows and other corporate ment. events. The Center is spread over 100 acres of land and includes 3 large exhibition halls of over 3.5.2 Applying the CLIP framework to 30,000 sq. ft. each, an open exhibition area Hitec City, Hyderabad spread over 350,000 sq. ft. and a trade fair Capital: The Hitec City comprises multi-occupant complex. buildings such as Cyber Towers (please refer Box 1 October 2004: Commencement of operations at for details) and Cyber Pearl and stand-alone Cyber Pearl or Phase III of the park, comprising individual company facilities such as Infosys over 300,000 sq. ft. of ready-to-use space with Development Center, Satyam Technology Center, plug & play infrastructure. HSBC Call Center, and Deccan Park TCS. The 2004­06: Completion of a number of indepen- dent IT Parks (e.g., Mindspace IT Park, Vanenburg IT Park, RMZ Futura IT Park), with 5 "Hitec city" Available at: http://www.ltinfocity.com/html/ built-to-suit facilities. hitec/cg.htm. last accesses August 2006 IT Parks: What Has Worked and What Has Not 31 estimated total investment in the park (without to around 16% of India's exports of IT and BPO considering the adjoining area of around 5,000 acres services. According to industry experts, 50% to 60% which falls under Cyberabad) is estimated at of the exports are from companies located in and USD$375 million. The multi-tenanted facilities around Hitec City. The clustering effect was also within the City were promoted by government of clearly visible, with a number of smaller companies Andhra Pradesh (GoAP) in partnership with reputed like SDT Technologies relocating themselves to private sector companies like L&T, K. Raheja Hitec City, to leverage proximity with larger players Group, Ascendas and the Emaar group, Dubai. which represented prospective clients. Andhra Pradesh Industrial Infrastructure Corporation (APIIC) which is the nodal agency for Given the product & services profile of key oc- the state/provincial government provided the land cupants, linkage to entities such as research & for development while the private players developed development institutes and centers of excellence and manage the facilities. This public-private does not appear to be critical. For promoting better partnership (PPP) model enabled leveraging of the i) co-ordination among IT companies located in Facilities development capabilities, ii) Financial Hyderabad and interactions with government, the strengths and ii) Marketing skills of the private Hyderabad Software Exporters Association sector partners (please refer Box 1 for details). The (HYSEA) was formed in 1991. Box 2 describes the construction cost of the multi-occupant buildings role played by HYSEA in development of the IT varied between USD$22 to 33/sq. ft. sector in Hyderabad. The association has also played an important role in development and growth of More than 150 companies currently operate out of Hitec City. Hitec City, with almost all focusing on IT and BPO Services. These include around 15­20 anchor Other than facilities management, the management occupants like GE, Microsoft, Oracle Corporation, of the IT Park does not offer any value-added HSBC, Keane, Accenture, Qualcomm, Verizon, services such as market access, business planning & Bank of America, CSC, most of which were operational support, or resource mobilization. provided space at concessional rentals factoring in discounts as high as 30%. infrastructure: Spread over an area of over 350 acres, Hitec City is only 30 minutes from the central Many of the large IT companies like Microsoft, business district of Hyderabad and about the same GE, Dell, Infosys initially commenced operations distance from the Hyderabad International Airport. in the multi-occupant buildings like Cyber Towers, Hyderabad is the 6th largest city in India, and is Cyber Pearl & Cyber Gateway and subsequently set well connected to all major cities in India through up their own facilities in the built-to-suit portion of the national & state highway and rail network. To the land. Plots were provided at significantly improve the road connectivity with other parts of discounted prices by APIIC, with discounts as high the city and Hitec, a outer ring road is being as 50%. constructed around the city. A new international airport is being constructed at Samshabad, about 20 Linkages: The focus of the occupants is primarily minutes from Hitec City. This will further improve on IT services such as system integration, applica- the air connectivity of Hyderabad. tion development, and package implementation and BPO services such as finance and accounting, Hitec city has a robust communication infrastruc- payroll processing, and customer care services, in ture in terms of the following: line with the relative competitive strengths of India as a country. Voice connectivity within and outside the park is provided by the state owned BSNL and private Most of the units cater to the export markets sector service providers like Tata Teleservices, including HSBC, Dell, TCS, Accenture, and Reliance Infocomm and Bharti. Google, which essentially operate as captive shared High speed optic fibre data connectivity is services centers for their parent companies. The total provided by VSNL and Software Technology IT and ITES exports from the state of Andhra Parks of India (STPI), both of which are Pradesh was USD$2.8 billion in FY06, translating connected to international gateways. 2 International Good Practice for Establishment of Sustainable IT Parks Box 2. The Role of HYSEA the Hyderabad Software exporters association (HYSea) represents one of the first active regional industry association of It and BPo companies in India. It was started in 1991 by Chief executive officers of 15 companies located in Hyderabad. the current membership of the association is around 294. HYSea aims to promote cooperation and good business practices among its mem- bers. Its various activities include: acting as a voice of the industry to government Providing a platform for discussing key issues impacting the It sector Providing membership at very low rates to ensure participation by both small and large companies arranging seminars Sharing of industry good practice among members Creation of industry databases Conducting training programs on areas such as leadership, HYSea also functions as a coordinator between industry & government and it acts as the collective voice of It and BPo companies. It activities in this area include: Constitution of Special Interest group for working on the draft Information technology Policy developed by goaP. representing the It industry on the Consultative Committee, under the department of Information technology and Com- munications to address critical issues involving the It sector. Interacting with the government in getting the area surrounding Hitec City declared as government "notified area" so that this area gets special developmental attention from the government, especially with respect to improvement of physical infrastructure such as roads, drainage, sewerage, and transport service. (Based on discussions with Mr. Shaktisagar, Former President, HYSea) The price of built-up space in Hitec City ranges between USD$55­$67/sq,ft. Monthly rentals Figure 4. Space Rental (USD/sq. ft) range between USD$0.67­$0.77/sq. ft for unfurnished space and USD$1.33­$1.55 for city lowest Highest furnished space. Hyderabad 0.44 0.84 Kolkata 0.51 1.00 Chennai 0.58 1.00 Where the space is leased out, the occupants need to Bangalore 0.76 1.20 sign an agreement with the developer. Salient new delhi 0.55 1.90 features of such agreements include: Mumbai 1.00 3.30 Source: Cushman and & Wakefield In-built escalation of 12%­15% of rental every three years Deposit equivalent to 6 to 12 months rentals Lock-in period of 3 years for unfurnished and 5 years for furnished spaces The unit cost of electricity is comparable with Lease renewal option solely with tenant other major Indian cities. Figure 5 compares the unit cost of electricity of Hyderabad with other A comparison between the monthly rentals in Indian cities. Hyderabad and other cities of India has been presented in Figure 4 below. The social infrastructure of Hyderabad is compa- rable to any other metropolitan city of India6: Hitec city has a dedicated 132 KV electricity sub station for providing uninterrupted electricity It houses two sailing clubs, flying club, golf supply to its occupants. course, a turf club and a number of shopping complexes, restaurants, and multiplexes. In addition, multi-tenanted buildings such as Cyber Towers, Cyber City, and Mindspace have 6 "Government of Andhra pradesh, india" Available at: generators as standby to ensure 100% reliability, http://www.aponline.gov.in/apportal/index.asp. last accessed in event of electricity outage. July 2006 IT Parks: What Has Worked and What Has Not 33 The good physical and social infrastructure, stable Figure 5. Electricity Tariff (cents/unit) law and order situation, location advantage (more or less centrally located between the northern and southern parts of India) and multicultural dimen- Mumbai sion of Hyderabad, ensures excellent quality of life for the residents of the city. According to many New Delhi industry sources, companies located in Hyderabad Bangalore have been able to attract and retain skilled human resources from other parts of India due to the better Chennai quality of life offered by the city. Box 3 below Hyderabad describes the experience of Keane India Limited, one of the anchor tenants of Cyber Towers. 0 5 10 15 Source : Center for Monitoring Indian Economy (CMIE). People: It is estimated that more than 160,000 persons are employed in the IT and BPO industry in Andhra Pradesh. Around 80,000 employees are estimated to be employed at Hitec City, comprising a mix of engineers, IT specialists and graduates (in BPO companies). The state of Andhra Pradesh has 23 The city has a large number of quality hotels universities and over 230 engineering colleges, with such as Taj Krishna, Taj Banjara, Marriot an aggregate output of 86,000 engineers every year, Viceroy, and ITC Kakatiya. including 32,000 computer science engineers and Hyderabad has a number of strong specialty graduates in computer-related courses. The total hospitals such as Apollo, CARE Hospital and number of students graduating from the universities Indo-American Cancer Institute and Research in other disciplines of science, arts or commerce is Center. A number of reputed schools are present more than 350,000 per year. Hyderabad itself has in Hyderabad such as Delhi Public School, four universities which account for a large proportion International School of Hyderabad, and of the workforce in the IT & BPO sectors, namely, Hyderabad Public School. University of Hyderabad, International Institute of Prominent residential areas like Banjara Hills, Information Technology, Osmania University and the Jubilee Hills, Begumpet are well connected to Jawaharlal Nehru Technological University. Hitec City. The city has been expanding in the direction of Hitec City with a large number of According to industry experts, manpower cost in residential and commercial complexes being Hyderabad, for IT and ITES professionals, is one of constructed in and around the region. the lowest in India. Box 3. Keane India Limited Operations at Hitec City, Hyderabad Keane India limited started its operations in 1998 from Cyber towers, Hyderabad. the company provides BPo services in areas of insurance, healthcare and financial services to clients in the US and UK. the revenues generated from its Hyderabad facilities was around USd$20 million in 2006 with the company having a staff strength of 500 within the park (50% of its total strength in India). Keane was one of the first few occupants of Cyber towers and hence received a concessional rate of USd$33/sq. ft as against the prevailing price of around USd$45/sq. ft. the company currently occupies the entire 8th floor of Cyber towers (Built up area of 52,000 sq. feet). In the initial years ,the physical infrastructure in and around Hitec City was inadequate. However, goaP invested heavily to develop quality infrastructure, including road network, electricity, water supply system, sewerage & drainage lines, and transportation system. to ensure quality communication infrastructure in Hitec City, StPI-Hyderabad was relocated to Cyber towers in 1998. one of the key advantages highlighted by Keane was the proactive attitude and easy accessibility of senior goaP officials in resolving infra- structure and other issues during the initial period. (Based on interaction with Brig. Harikumar Krishnannair, Head- Knowledge and learning, Keane India limited) International Good Practice for Establishment of Sustainable IT Parks The average salary of a junior level IT professional GoAP has made English compulsory in gradua- (less than one year work experience) in a tion stage to increase the supply of English- company located in Hitec city is around USD$3 speaking graduates. 300 to $4 500 per annum. The average salaries of middle level IT profes- 3.5.3 Key Lessons sionals (2 to 4 years of work experience) and Hitec City is one of the more successful IT Parks in highly experienced IT professional (more than 5 India. The park has been able to achieve its years work experience) ranges between USD objective of generating employment with Hitec, $8,900 to 11,000 per annum and USD$17,700 employing more than 160,000 people. Using Hitec to 33,300 per annum respectively. City as the focal point, a larger IT City-- Cyberabad has developed in the surrounding area. Interaction with companies located in Hitec City Today, Hyderabad with its world-class infrastruc- indicate that they are satisfied with the quality of tural facilities required by the IT sector is one of professionals available. While more than 80% of the the preferred destinations for IT companies in workforce of small companies like SDT technolo- India. Large IT companies such as Microsoft, IBM, gies (a software product development company) SAP, Oracle, Infosys, TCS, Satyam, Wipro, and represent localities, the proportion is around 40% CTS are located in the Hitec City. The key to 50% for larger companies like Keane India elements that have led to the park's success are as Limited. follows: To meet the human resource requirements of the IT A supportive and proactive government, which sector, the state government has undertaken a properly marketed the IT Park and was able to number of initiatives, including: attract key large anchor investors like Microsoft and Oracle. Government in partnership with the private World-class physical and virtual infrastructure, engineering colleges and industry has launched a which has been created through a public-private unique program named "Jawahar Knowledge partnership and managed by an efficient private Center" (please refer to Box 4 for details). The management team that provides world-class Jawahar Knowledge Centers (JKCs) act as the quality service to occupants. finishing schools for IT students imparting them Steps were taken by government on a public- with industry oriented skills. private partnership basis to augment the human Box 4. Highlights of the Jawahar Knowledge Center Scheme the gap in the quality of talent available locally was initially identified as a limiting factor for the industry in aP. In order to improve the quality of It students, especially from private colleges, goaP started the Jawahar Knowledge Centers (JKCs) in 2004. the Jawahar Knowledge Center was an initiative started collectively by the private colleges, industry participants and different agencies of goaP like the department of Information technology, Institute of electronic governance and andhra Pradesh State Council of Higher education. these JKCs act as finishing schools for the final year students. as part of this program industry grade skills are imparted to final year stu- dents to make them industry-ready. In each of these JKCs, training programs are conducted by industry-trained mentors and JKC trained students. Hands on training is provided through live projects. goaP offers the students small computerization and e-governance projects for Urban local Bodies, rural local Bodies and government departments. the participants are trained both in soft (e.g., mock inter- views, group discussion, teamwork) skills and technical skills. a number of It companies actively participate in the training programs. In 2004, in the first year, 36 JKCs were created. the program covered 1066 female students from 102 private engineering college. out of these 235 students were recruited by companies like IBM, Infosys and Satyam. In the second year, the intake was increased to around 6000 from 163 colleges spread across aP. around 1300 students were recruited by companies like Wipro, Satyam, Infosys, IBM, tCS, Ca, and Intelligroup. In the second year JKC was also extended to 11 non-engineering degree colleges to train students in BPo skills (e.g., medical transcription, data processing). 45 such trained students were selected by nipuna, a Hyderabad based software company. In 2006, the program has been extended to cover 13000 students from over 200 colleges. (Based on discussions with dr. g. Subbarao, State Chief Information officer & e.o. Special Secretary to Chief Minister, goaP & dr. t.S. reddy, academic director, Institute for electronic governance, Hyderabad) IT Parks: What Has Worked and What Has Not 35 resource and thus improve the quality of complex being constructed by Hubli-Dharwar manpower for ensuring supply of skilled Municipal Corporation as the IT Park-Hubli. manpower resources for the IT Park occupants. 2000: Larsen and Toubro Ltd., a well established Single-window clearance system created in the construction company with extensive experience form of APIIC, which reduced the procedural in constructing IT parks, was appointed by GoK delays for the real estate developers and thus to redesign the commercial complex and enabled them to construct multi-occupant construct IT Park-Hubli. buildings/built to suit facilities in the park, September 2002: IT Park-Hubli was inaugu- minimizing delays on account of clearance/ rated. The initial occupants were STPI-Hubli, regulatory processes. Tata Teleservices and Karnataka State Electronics Development Corporation Limited (KEONICS) 2002­2004: Other than the initial occupants, no major IT firm had taken space in the IT Park. . IT Park, Hubli, India The other occupants in the IT Park were non IT commercial organizations. However, a few local 3.6.1 Background small IT players leased out incubation space at The IT Park at Hubli7 is located about 420 km the STPI facility in the IT Park-Hubli. north of Bangalore, the capital of the state of May 2006: To overcome low occupancy rates, Karnataka, which is often hailed as the Silicon Valley GoK organized an event called "Destination of India. Hubli-Dharwar is the second largest urban Hubli" to attract IT companies to the park. GoK center of Karnataka after Bangalore with a popula- also initiated steps to reduce the rental cost of tion of around 900,000. the space available in IT Park, Hubli through policy actions. With the rapid growth of Bangalore city, fueled by June 2006: GoK announced plans to develop an the growth of the IT sector, there has been a additional 40 acres of land adjoining the existing tremendous pressure on the city's infrastructure. IT Park building as stand alone development Moreover, given the shortage of available office space centers for IT & BPO companies. in the city, rentals have been increasing at a rapid pace, which was forcing several IT companies to 3.6.2 Applying the CLIP Framework to explore options of locating their operations in other IT Park, Hubli states. With the objective of reducing pressure on Capital: The estimated initial investment in the Bangalore and retaining/attracting IT organizations physical facilities of the park was USD$ 10 million, in the state, the government of Karnataka wanted to with the Department of Information Technology develop the Tier II cities as an alternate destination funding the entire investment. The park is managed for the IT companies. The development of the IT by KEONICS9, a state-owned enterprise. park at Hubli was part of such an initiative launched by the state government. Despite four years having passed from completion of development and increasing demand from estab- The construction of the park started in the late lished IT and BPO services companies for setting up nineties and spanned a period of around 2­3 years. new facilities in second tier Indian cities, only 10 The first 277,000 sq. ft. multi-occupant building companies have set up operations at the park. was ready for occupation in 2002. Till date, around 100,000 sq. ft. of the existing facilities have been Many government agencies like STPI-Hubli occupied8. Key milestones in the development of IT- (4,000 sq. ft.), Koenics (2,300 sq. ft.) and Park Hubli include: Indian Institute of Information Technology (IIIT), Hubli (22,000 sq. ft.) are occupants of 1998: Government of Karnataka (GoK) decided to develop Tier 2 cities such as Mangalore, 7 "Software technology parks of india, Hubli" Available at: Hubli-Dharwar and Mysore as additional IT http://www.hubli.stpi.in/index.html. last accessed July 2006. hubs, to provide alternate and low-cost options 8 "no takers for Hubli it park" Available at: http://sify.com/ finance/fullstory.php?id=13880597. last accessed July 2006 for IT companies. 9 "KeonicS" Available at: http://www.keonics.com/. last 1999: GoK decided to redesign a commercial accessed August 2006. International Good Practice for Establishment of Sustainable IT Parks the IT Park. In addition to Tata Teleservices institutes, centers of excellence do not appear to be which provides voice connectivity to the park critical. The park is managed by Koenics, which and occupies around 14,000 sq. ft., all these does not offer any value-added services such as agencies were among the initial occupants of market access, business planning and operational the park. support, or resource mobilization. Recently, in Koenics acts as the manager of the park and September 2005, to create an environment suitable provides facilities such as backup electricity for growth of the IT sector in North Karnataka and supply, maintenance, security, and car parking. to increase interaction between industry, academics It also runs a IT training center inside the park. and government, the BPO-ITES-CRM (BIC) Though IIIT-Hubli has occupied space in the Society was formed. The Society acts as a common park from 2002, it is still not operational. The forum for all the stakeholders and facilitates space is occasionally used by the IIIT manage- exchange of ideas. ment for meeting and seminars. A few start up/initial stage companies like Sagar STPI-Hubli, which is housed in IT Park, Hubli, Technologies and V-7 Technologies operate out provides incubation space to small start-up compa- of the business incubation center run by STPI- nies. The facilities provided to these companies Hubli. include internet connectivity, telephone connections, Neilsoft, which has its Indian head quarters fax, access controlled security system, conference located in Pune, started its operations from the facilities, electricity backup and computers. incubation center in STPI-Hubli and has subsequently rented out around 10,000 square The rental charged for such space is USD$145 per feet space in the IT Park. workstation per month with the number of worksta- Other occupants include service providers like tions currently available being 24. A number of Tata Teleservices and commercial establishments Hubli-Dharwar based small companies have availed such as banks, computer service centers, and such facilities and then moved out to locations shops. outside the park after achieving a minimum scale of operations. However, the park failed to attract large IT & BPO companies unlike other tier 2 cities in Karnataka infrastructure: Hubli is one of the most prominent like Mysore, where Infosys Technologies, one of the cities in North Karnataka and is about 600 kms largest IT companies in India, has set up its from Mumbai, 400 kms from Pune, 560 kms from corporate training center at an estimated investment Hyderabad and 800 kms from Chennai. of USD$56 million. GoK, having realized the importance of attracting anchor tenants into Hubli National Highway (NH 4) connects Hubli with for development of the IT sector in the city, is Bangalore, Pune and Mumbai. NH 4 is a part of currently offering both land and built-up space at the Golden Quadrilateral Project, which aims to concessional rates to such players. augment road connectivity between important cities in India. Bangalore and Pune are around Linkages: The focus of the current occupants is 8 to 10 hours from Hubli by road. The city is primarily on IT services like application development well connected by state and national highways and BPO services such as customer care services, to other cities in North Karnataka such as insurance claims processing, and engineering designs Belgaum, Haveri, Davangere, and Bellary. & cad-cam drawings, in line with the relative Hubli is also well connected to Bangalore, Pune competitive strengths of India. However, services and Mumbai by rail, with travel time to offered by current occupants appear to lack requisite Bangalore and Pune being around 8 hours and depth, given that these are all early stage companies. Mumbai around 12 hours. Consequently, Hubli-Dharwar accounts for only Though the road and rail connectivity of Hubli USD$1.2 million IT and BPO revenues, which is with other parts of India is satisfactory, it is not only 1.5% of IT & ITES revenue of the state. well connected by air. Hubli has its own domestic airport, however, there is only one Given the product and services profile of key flight operating from the airport connecting occupants, linkage to research & development Bangalore and Belgaum. The nearest interna- IT Parks: What Has Worked and What Has Not 37 tional airport is around 180 kms from Hubli The average commercial space rental in Hubli is located at Goa, which is around 3.5 hours less than half compared to tier 1 cities such as journey from the city by car. However, the Kolkata, Bangalore, and Hyderabad. closest international airport with a critical mass Residential rentals are 20% to 30% lower than of international flights is Bangalore Interna- other second tier cities such as Ahmedabad and tional Airport, located about 400 kms from the Kochi. city. The state government has announced a scheme recently to provide land to large IT and BPO Robust communication infrastructure exists within companies at a subsidized rate (20% to 30% and outside the IT Park. The data and voice cheaper than the market rate). Additionally, connectivity infrastructure is provided by two state depending on the quantum of investment made owned operators, namely, BSNL and STPI along & employment generated, such companies will with Tata Teleservices, a private sector telecom receive a concession on stamp duty & registra- operator. tion charges on such land procured ranging between 50% to 100% of the amount. Voice connectivity services are provided by major telecom service providers including the state Though the IT Park has excellent electricity owned BSNL and private sector players such as connection in terms of a dedicated 11 KV feeder Tata Teleservices, Reliance Infocomm, and Bharti. and 100% generator backup facility, Hubli itself To ensure high quality data connectivity, TPI- often faces electricity shortages. The electricity Hubli is housed within IT Park Hubli. STPI- utilities charge a concesssional rate of USD 8 cents Hubli, the fifth internet gateway in Karnataka, per unit, in comparison of 10 cents per unit charged has its earth station in the IT Park. High speed other industries (Source: Karnataka Electricity optical fibre data connectivity (4 Mbps gateway Regulatory Commission). GoK is spending USD$5 upgradeable to 45 Mbps) is provided by STPI, million to improve the electricity system and which has its international gateway in provide reliable electricity supply by replacing old Bangalore. poles/conductors and transformers. The relatively high rentals at IT Park-Hubli, The IT park is dependent on the urban infrastruc- compared to other similar facilities available in ture at Hubli, which is essentially a tier II city and Hubli and other second tier cities of Karnataka have lacks the infrastructure and amenities of a tier 1 city been identified as one of the main reasons for low such as Bangalore, New Delhi, or Mumbai. As per occupancy. industry sources, one of the main reasons why Hubli-Dharwar could not attract major IT and The rental charged for leasing out space in IT ITES companies is the lack of quality physical and Park-Hubli varies between USD$0.33 to 0.66/ social infrastructure. The city does not house any sq. ft/month as against USD$0.11 to 0.22/sq multiplex and has very few quality shopping centers, feet/month in other parts of the city. For this recreational facilities, eateries, or modern housing reason, companies like N.S. Infotech, facilities. Further, there have been law and order Transparent Technologies, IBSI India and Rite problems in the past on account of tension between Scribe have decided to set up offices in other two communities. parts of the city. GoK has since recognized the problem of high People: The state of Karnataka has 19 universities rentals and in May 2006, it has issued a govern- and over 100 engineering & technical colleges, with ment order reducing the rentals to around engineers, IT specialists and computer-related USD$0.22 to 0.33/sq. ft/month for IT Park, courses over 75,000 students graduating every year. Hubli. Post reduction in rentals Neilsoft has Traditionally the Hubli-Dharwar twin cities are leased 10,000 sq. ft. area in the IT park. considered as the educational hubs of the North Karnataka region. Being a tier 2 city, rentals and land prices in Hubli are cheaper than other Indian cities such as Kolkata, Hubli-Dharwar has two universities with more Pune, and Bangalore. than 180 colleges affiliated with these universities. 8 International Good Practice for Establishment of Sustainable IT Parks There are 16 engineering colleges in North For the IT park to be successful, it is important Karnataka, with two of these engineering that basic social infrastructure (health care, colleges being located in Hubli. Around 1100 education, recreational facilities)is present in the students graduate from these 2 engineering neighborhood of the IT Park. Without such colleges annually. facilities, it is difficult to attract quality human There are more than 60 graduate colleges resources. situated at Hubli, out of which 24 are degree The management of IT Parks needs to provide colleges. Around 20,000 students graduate from value added services, especially to relatively small these colleges every year. and medium sector occupants, such as business development support, networking support, and The average cost of human resources available in accounting assistance. Hubli is cheaper compared to other cities located in Private players are best suited for managing IT the state of Karnataka like Bangalore, Mysore, and parks as they enjoy relatively higher operational Mangalore. flexibility vis-à-vis government. For example, when changing the rent schedule, government The average salary of junior level IT professionals needs to pass an order, which is time consuming. varies between USD$2,200 to $3,300 per Such decisions can be taken in the private sector annum. without having to follow the similar approval For an IT professional working in the middle processes. and top management level, the average annual salary varies between USD $4,400 to $6,600 and USD$8,900 to $13,300 respectively. . Singapore Science Park, The local IT and ITES industry is satisfied with the Singapore quality of students graduating out of the colleges present in Hubli. Major IT companies present in 3.7.1 Background India such as IBM, Infosys, Wipro, Sasken, Singapore Science Park (SSP) is one of the earliest Mindtree, Progeon, and Tata Consultancy Services science and technology parks of Singapore. In the recruit engineering graduates from Hubli. In Hubli- late 1970s Singapore's economy was driven mainly Dharwar and Belgaum (situated around 90 kms by the manufacturing sector. In the early 1980s, from Hubli-Dharwar) around 300 IT and ITES Singapore identified new technologies and research professionals are employed. More than 95% of these and development as key areas of the country's future employees are local. economic growth. In this backdrop SSP was established in 1980s. 3.6.3 Key Lessons The IT Park at Hubli has not been able to fully The main objective for developing SSP was to stimu- achieve the envisaged objective of attracting IT late innovation and generate economic benefits by companies that could consider Hubli as an alterna- assisting knowledge-based firms and knowledge tive to Bangalore. Thus far, there are no large IT intensive activities. companies occupying space in the IT park. In 2006, the IT park housed some small companies, govern- The development of Singapore Science Park took ment training institutes, and service providers. place over a period of more than 25 years and included the following major milestones: However, more than 50% of the park was vacant. The case study of Hubli IT Park highlights the 1980: The government of Singapore approves following key lessons: construction of Singapore Science Park. 1982: The first tenant of the park, Det Norske In the initial phase, it is important to attract Veritas (DNV) sets up office at Science Park I. large anchor tenants in an IT Park. One of the 1988: The National Computer Board of Singapore key motivators for anchor tenants to locate to an officially inaugurates its building at SSP. IT Park is comparatively lower rentals and 1992: Technology Parks Pte Ltd, a subsidiary similar benefits. company of Jurong Town Corp., established to IT Parks: What Has Worked and What Has Not 39 manage the Singapore Science Park on a More than 300 companies operate out of SSP, with commercial basis. around 50% of them being in the IT & telecom- 1993: Construction of Science Park II commences. munication sector, 11% in chemical, 10% in 1996: The Park introduces an array of value- engineering, and the balance focusing on areas such as life sciences, pharmaceuticals, and food& flavors. added services to benefit tenants such as sports About 50% of the tenants are foreign firms. In terms facilities, restaurants, organized activities, free of their origins, 27%, 11% and 9% are from USA, shuttle bus services and childcare. The Europe, and Japan, respectively. Around 70% of the Innovation Center opens at the Science Park as local firms are small and medium enterprises, with Singapore's first incubator facility for start-ups. 23% being start-up companies. The Park's foreign The S$12 million Science Hub opens at the Park occupants include global players such as Sony, as Singapore's first business and recreational hub Silicon Graphics, and Lucent Technologies. The Park provides business incubation services to start-up exclusively for SSPs corporate tenants. companies, including helping tenants initiate contact 1997: Arcasia Land Pte Ltd. replaces Technology with venture capitalists. Singapore has a vibrant Parks Pte Ltd as developer and manager of SSP venture capital sector with more than 160 venture consequent to a series of corporate restructuring capital firms, managing funds of over S$17 billion. exercises. 2000: SSP partners with Sophia Antipolis Linkages: The focus of the SSP occupants is Science Park of France to explore collaborative primarily on EDP and office equipment, IC and business initiatives. components, basic and advanced telecommunica- 2001: Ascendas Pte Ltd. replaces Arcasia Land tions technology. Most of the units cater to both Pte Ltd as a result of a merger between Arcasia domestic and export markets. R&D support is and JTC International, former international arm provided by government-promoted R&D institutes of the Jurong Town Corporation. such as the Center of Wireless Communication and 2002: Galen, the first building in Science Park the Institute of Microelectronics, as well as academic III is completed. Ascendas Real Estate institutes such as National University of Singapore, Investment Trust (A-REIT) is listed on the and the Nanyang Technological University. Singapore Exchange as Singapore's first business and industrial property trust. The four multi- Ascendas, the private company responsible for tenanted Science Park buildings in the A-REIT managing the park, provides a number of value portfolio include Alpha, Gemini, Aries and added services. Such services include: Capricorn. Market access services to occupants to help them 3.7.2 Applying the CLIP Framework to enter new markets Singapore Science Park, Singapore Promotional services for occupants' products, Capital: Singapore Science Park is owned and 10 technologies, applications, and services operated by Ascendas Pte Ltd11. In the initial phase, Helping the occupants collaborate with compat- SSP received significant support from the govern- ible business or technology partners, through its ment of Singapore. The government allocated the wide network of alliances with organizations and park around 15 acres of land at Ayer Rajah Road science, technology, and industrial parks during Phase I development and committed around Helping companies recruit through its alliance 30 acres of state land for its Phase II development. partners The Park development was incorporated into the National Technology Plan. Moreover, to enhance SSP has established linkages with a number of the Park's development and competitiveness, some Science and Technology (S&T) Parks all over the of the key government organizations like the Science world to explore complementary and synergetic Council of Singapore, the Singapore Institute of opportunities of the respective occupants in these Standards and Industrial Research, the National parks. Examples of such S&T Parks include Sophia Science & Technology Board, and the Information Technology Institute were relocated into or estab- 10 "Singapore Science park" Availbale at: lished in the Park. These government organizations http://www.singaporesciencepark.com/home/index.asp August, 2006 have effectively acted as anchor occupants of the 11 "Ascendas" Available at: http://www.ascendas.com/home/ Park. index.html. last accessed July 2006. 0 International Good Practice for Establishment of Sustainable IT Parks Antipolis Science Park, France; Alberta Research Council, Canada; Zernike, Australia; Heidelberg Figure 6. Road Connectivity, SSP Technology Park, Germany; Technopolis, Finland and International Business Incubator, USA. infrastructure: Spread over an area of over 133 acres, SSP includes a number of amenities and facilities such as auto-banking, conference facilities (at Science Park I and II), clinics, childcare facilities, convenience stores, eateries and restaurants and fitness corners. Intra Science Park shuttle bus service is available to users. Box 5 below describes the experience of DNV, one of the anchor tenants located in SSP 1. The Park is located about 30 minutes from the Changi International Airport and is well located at the heart of Singapore's Technology Corridor near Jurong Industrial Estate and the Central Business District. Figure 6 shows the location of SSP. The advantageous location helps the Park to leverage the urban, transportation and social infrastructure of Singapore together with data and voice connectivity. Source : Singapore Science Park ­ http://www.singaporesciencepark.com SSP's rentals and land leases are quite competitive with the rentals in the Innovation Center being 30% to 50% lower than the average market rate. engineers and IT specialists, MBAs annually from People: 7,000 research engineers, scientists, and Universities, colleges and polytechnics, with the supporting staff are employed at the park, with average annual salary of IT professionals at the 52% holding basic degrees, 16% holding Masters' middle management level being around degrees, and 12% PhDs. There are four educational USD$40,000. As per Infocomm Development institutes located near SSP, namely, National Authority (IDA)12, in Singapore more than University of Singapore, Nanyang Technological University, Ngee Ann Polytechnic and Singapore 12 "iDA Singapore" Available at http://www.ida.gov.sg/ Polytechnic. Singapore produces more than 14,000 idaweb/marketing/index.jsp. last accessed August 2006. Box 5. DNV, Anchor Tenant in SSP dnV, tech Center was established in SSP 1 on 17 January,1984, at 10 Science drive and it was one of the first companies to set up offices at SSP. dnV was provided land on lease for 20 years, which subsequently was extended by another 10 years. the company benefits from world class utilities & services available to park occupants in terms of telecommunication services, electricity supply, water supply and drainage & sewerage,. occupants are also offered discounted memberships at the recreational clubs in SSP 1. Moreover, Singapore as a city provides excellent physical, social, and recreational infrastructure to the occupants. transport services connecting SSP are expected to improve further with a new Mrt terminal coming up. to dnV, being able to set up their office in SSP 1 has added tremendously to the company's brand image. this is primarily on account of stringent entry & operating standards as part of which only companies involved in areas such as high end technology, engineering, and r&d services are allowed to operate out of the Park. Consequently, the occupants command instant recognition and a distinct brand image within Singapore. (as discussed with Mr. Fung Chan Hua, Head- risk & HSe Services, dnV technology Services, Singapore) IT Parks: What Has Worked and What Has Not 41 110,000 persons are employed in Infocomm industry. This represents around 5% of the total Figure 7. Distribution of Infocomm work force of the country. Figure 7 shows the Manpower distribution of Infocomm personnel across occupational categories. Employment in the sector Others is projected to grow at 4­5% per annum over the 8% next 4 to 5 years. Digital Media 6% 3.7.3 Key Lessons R&D SSP is one of the most successful parks in Singapore 6% and houses large companies focusing on R&D in System management high end technology. The park has 100% occupancy Network & Data 27% rate. Being located in SSP I is considered a privilege Communication 8% in Singapore, which adds to the occupant's corpo- Software Sales & Marketing 26% rate/brand image. 19% The SSP case study highlights the following key Source : IDA, 2004 lessons: A vibrant and pro-active park management team is key to the success of the IT Park. The manage- 1997: Groundbreaking ceremony at Cyberjaya; ment team at SSP provides a number of value Cabinet announces decision to have University added services such as business plan develop- Telekom or Unitele set up its multimedia faculty ment, networking, accounting assistance, and in Cyberjaya, marking the beginnings of the incubation space. Multimedia University. Close linkage with academic institutions like 1999: Inauguration of Cyberjaya and launch of universities and colleges and R&D institutes are the MSC Central Incubator in Cyberjaya. essential for parks where the primary focus of 2002: Launch of the MSC Flagship Center (now key occupants is technology innovation. known as MSC Innovation Center) comprising Creating a powerful brand image of the park is Creative Application Development Center one of the key elements that has led to SSP's (CADC) and Solution and Assessment success. Development Center (SADC) in Cyberjaya. 1999­2006: Various companies commencing operations in Cyberjaya; alliances with different .8 Cyberjaya Flagship Zone, countries such as the United Arab Emirates, Sri Lanka, and India. Malaysia 3.8.2 Applying the CLIP Framework 3.8.1 Background The government of Malaysia developed the to CFZ Capital: The estimated initial investment in the Multimedia Super Corridor Project with the objective physical facilities of the park was around USD$2 of creating an ideal multimedia environment to billion, funded by a joint venture company between attract world class multimedia/IT companies. The the government and four other companies, namely, project aimed at creating a hub for Malaysian Setia Haruman Sdn Bhd, Nippon Telegraph and multimedia/IT companies to enable them to become Telephone Corporation (NTT), Golden Hope world class standard over time, through operating in Plantations, Permodalan Nasional Berhad (PNB). a highly competitive environment. The Cyberjaya CFZ has been developed through public-private Flagship Zone (CFZ)13 is one of the five cybercities partnership. Cyber View, a government Linked developed during phase I of the Multimedia Super Corridor project, conceptualized and implemented 13 "Setia Haruman Sdn. bhd. ­ cyberjaya's Master Developer" during the period from 1995­2006. Key milestones Available at: http://www.cyberjaya-msc.com/profile/background. in the development of Cyberjaya include: htm. last accessed August 2006. 2 International Good Practice for Establishment of Sustainable IT Parks Company (GLC), is the owner of all the land in connected domestically through major highways and Cyberjaya. Setia Haruman Sdn. Bhd, a private railway networks. According to the users, through enterprise, is the master builder. Sepang Town the road network connecting CFZ is good, public Council, a local authority, is responsible for all transport services need to be augmented. planning approvals for Cyberjaya. There are 363 companies operating from the park, which include CFZ has a robust communication network is terms around 20 large global players like Shell, DHL, of the following: HSBC, Motorola, Fujitsu, Ericsson, and small, local companies. The park offers business incubation It is served by state-of-the-art optical fibre services through the MSC Central Incubator telecommunication network with a capacity of including venture capital support. 2.5 to 10 Gbps. CFZ has a dedicated international gateway at Linkages: The focus of the current occupants is Kuala Lumpur. primarily on BPO services such as finance and Voice connectivity within and outside the park is accounting and payroll and human resources provided by telecom service providers like processing with most of the global players having Telekom Malaysia and Maxis Communications. their captive shared services centers in Cyberjaya. Consequently, many of the occupants are focused on Services such as electricity and water supply are export markets. The government is in the process of provided by public utilities. The average electricity implementing a number of e-Government applica- tariff is 8 cents per unit. The occupants need to tions, where Multimedia Super Corridor14 registered pay between 50 to 60 cents per m3 of water companies, of which CFZ is a component, are given consumed. All service providers enter into a preference. The Multimedia Development performance agreement with users as part of Corporation (MDeC)15, an arm of the government which: acts as a single window for obtaining requisite government approvals and facilitates business linkages Services are to be provided for 24 hours and 365 with the government. MDeC also undertakes days a year. capacity development programs in areas like process A 99.9% reliability guarantee is to be provided. standardization and conformance to good practice. If the services are not provided as per agreement, the service providers are subject to financial infrastructure: Spread over an area of over 7,000 penalties. The space rentals in CFZ are competi- acres, Cyberjaya includes i) a residential zone tive compared to rentals of similar space in other (>3000 houses & apartments), ii) an enterprise IT Parks in and around Kuala Lampur. However, complex/office area (>2.2 million square feet), iii) an the land prices at CFZ are higher for enterprise incubation center (> 60,000 square feet), iv) a and commercial zones. A comparison between commercial zone (> 30,000 sft) and v) a green and the monthly rentals and land costs of CFZ & environment friendly recreational zone, Taman Tasik other cybercities in Malaysia has been presented Cyberjaya (around 89 acres). in Figure 8 below. Number of persons residing in CFZ is around 11,000. People: Around 15,000 employees are estimated to be deployed at Cyberjaya Flagship Zone, comprising Being a comparatively new township, people a mix of engineers, IT specialists, and graduates (for perceive CFZ as dull and boring compared to IT enabled services). Many of these employees are Kuala Lampur. foreign citizens. The total number of foreign citizens The facilities and amenities present in CFZ are estimated at 1,300 in 2006. Figure 9 provides include supermarkets, book stores, healthcare details of the distribution of foreign citizens by their facilities, petrol pumps, banks, fire station, country of origin. The Multimedia University and schools, hotels, and spas. However, CFZ lacks adequate number of eateries & restaurants. 14 "MSc Malaysia" Available at: http://www.msc.com.my/. last accessed August 2006. Cyberjaya is about 45 minutes from the Kuala 15 "Multimedia Development corporation Sdn bhd" Available at: Lampur International Airport and is also well http://www.mdec.com.my/. last accessed August 2006. IT Parks: What Has Worked and What Has Not 43 Figure 8. Space Rental/Cost office rent parking enterprise residential commercial (uSD per sft charges land cost land cost land cost cybercities per month) (uSD per month) (uSD per sft) (uSD per sft) (uSD per sft) Cyberjaya Flagship Zone 0.88­1.2 32­33 16.5­17.5 10­14.5 23­30 technology Park Malaysia 0.93­1.1 32­33 na na na Kaula lampur City Centre 2.32­2.42 37­38 na na na UPM-MtdC technology 0.7­0.8 na na na na Incubation Center Penang Cybercity 1 0.6­0.9 25­30 5.4­7 16.5­21.5 19­27 Kulim High tech Park 0.6­0.7 na 3.5­4 6.5­7 5­5.5 Source: Multimedia development Corporation (MdeC) Sdn. Bhd, dtZ research Figure 9. Foreign Citizens in CFZ CFZ case study highlights the following key lessons: Others ASEAN 1% 20% Flexible land use policies provide IT Park developers with more options for recouping Oceania their investments. In CFZ, along with IT 5% office space, developers were allowed to Indian construct commercial and residential com- 50% plexes which typically provides higher returns Europe than IT office space. Such flexible land use 12% policy provided an added incentive to the real estate developers. World class physical and virtual infrastructure USA 3% East Asia represent essential necessities. Infrastructure like 9% roads, urban and social amenities like recreation Source : MDeC Sdn. Bhd, DTZ Research and sport, proximity to airport and virtual infrastructure in terms of state-of-art data & voice connectivity are absolute essential pre- requisites for successful IT parks. A judicious mix of anchor occupants and small companies helps. CFZ was able to attract LimKokWing University College of Creative reputed companies like Dell, HSBC, IBM and Technology are situated in Cyberjaya providing a Shell along with some local, small companies. ready pool of more than 13,000 human resources trained in foreign languages and IT skills annually. The average annual salary of IT professionals at the middle management level is around USD$20,000 to 25,000. . Critical Business Success Factors and The Relative 3.8.3 Key Lessons Positioning of IT Parks CFZ has moderately been able meet the envisaged objectives. A number of global players like Dell, Based on the individual IT Parks assessed as part of HSBC and IBM have started their operations in the the study, a summary of the positioning of indi- IT Park. In 2006, 15,000 people were employed in vidual parks with respect to critical business success CFZ. factors has been provided below. International Good Practice for Establishment of Sustainable IT Parks Figure 10. Capital Hitec city, it park-Hubli, SSp, cFZ, taedok Valley, ZSp, india india Singapore Malaysia Korea china ownership PPP government originally PPP Private Private government; presently private Management PPP government Private government government government anchor tenants large Indian government government & global It and large Korean global It and Private, agencies Private companies BPo Private, hardware Companies global (mainly r&d) companies Companies, companies, It and BPo large public large Chinese companies r&d Institutions companies access to VC/Pe no dedicated no dedicated Vibrant VC/Pe dedicated dedicated VC dedicated VC funds; Fairly funds; Fairly market government Fund funds administered matured VC/Pe matured VC/Pe sponsored Beijing Municipal market market VC funds government Business not provided Provided by StPI- Provided ­ it is Provided Provided Provided through Incubation Hubli, limited one of the focus individual Services space services universities PPP: Public Private Partnership; VC: Venture Capital; Pe: Private equity Figure 11. Linkages Hitec city, it park-Hubli, SSp, cFZ, taedok Valley, ZSp, india india Singapore Malaysia Korea china Product & Services It & BPo services BPo services r&d, hi-tech BPo services telecommunication It goods & products; It services technologies, r&d services, Chinese language software for domestic market Forward & export market Mainly domestic domestic and export market domestic and domestic and Backward oriented market oriented, export market oriented export market export market linkages few companies oriented oriented oriented export oriented Value added none none Business none Marketing and none Services by Park development Sales support, Management support, marketing r&d support support Centres' of none none r&d Institutions, Multimedia r&d Institutions, Beijing & tsinghua excellence nUS, S&t Parks University KaISt, etrI, ICU, University, Chinese outside Singapore Chungnam academy of Sci- University ence, Chinese academy of engineering, r&d Institutions IT Parks: What Has Worked and What Has Not 45 Figure 12. Infrastructure Hitec city, it park-Hubli, SSp, cFZ, taedok Valley, ZSp, india india Singapore Malaysia Korea china electricity Supply ­ government, government, reliable supply, reliable supply, government, government, It Park dedicated dedicated service level service level dedicated supply dedicated supply electricity line electricity line, contract present contract present backup facilities subsidized price, present backup facilities present telecommunication Competitive Competitive Competitive Competitive Competitive Competitive Market Market Market Market Market Market Internet Service government government government government Private dominated government Providers and Private and Private and Private and Private and Private road Connectivity good Fair excellent excellent excellent excellent Urban & Social leveraging the Inadequate, given leveraging the good, integrated good, integrated good, integrated Infrastructure quality infrastructure that Hubli is quality infrastructure commercial and township with township with com- of Hyderabad, non-metropolitan of Singapore residential clusters commercial, mercial, residential one of the largest city residential & other & other land uses cities of India land uses Housing good, available Worse, compared excellent, average, around good, around good near the It Park, to tier 1 cities leveraging the 3600 houses & 16,400 houses mainly Private quality housing apartments within inside the park Sector/PPP stock of Singapore the park Figure 13. People Hitec city, it park-Hubli, SSp, cFZ, taedok Valley, ZSp, india india Singapore Malaysia Korea china engineering >20,000 from 1100 from Hubli 14,000 from 13,000 from 30,000 from 100,000 from throughput Hyderabad (75,000 from Singapore CFZ taedok Valley ZSP per year (90,000 from aP) Karnataka) annual average 9,000­11,000 4400­6600 40,000­ 20,000­ 10,000­12,000 Salary (USd)16 for 50,000 25,000 middle management employees employment 80,000 300 7,000 15,000 >25,000 650,000 within Park .10 Business models for IT and the private sector in promoting IT parks differ significantly in the six case studies. For example, Parks while Andhra Pradesh Industrial Infrastructure It is evident from the individual case studies that there are significant variations in the business 16 Salary figures based on expert opinion and "neoit ito and bpo Salary Survey report 2006" Available at: http://www.neoit. models followed for developing and managing com/pdfs/Whitepapers/OIv4i04_0506_ITO_and_BPO_Salary_ sustainable IT parks. The role played by government Report_2006. August, 2006 International Good Practice for Establishment of Sustainable IT Parks Corp., a government organization, has partnered from the market. Government can act as a with private players such as Ascendas and Larsen & facilitator in this respect, and assist the private Toubro Ltd. to develop Hitec City, Hyderabad, the players in acquiring requisite land. In case the IT Park Hubli is promoted and managed entirely by land is owned by government, it can further different agencies of the state government of help the park developer by taking an equity Karnataka. The role of government ranges from stake in the project, which is equal to the cost of providing land or funds for developing IT parks to the land. managing facilities post commissioning such parks. Develop enabling policies and regulations for The private sector partner on the other hand brings both park developers and occupants for ensuring in experience and expertise in construction, financial that the objective with which the park was resources, and better marketing skills. established is fulfilled. Based on ownership and management of IT parks, IT Parks are best managed and operated by the different business models can be worked out for private players, given their flexibility in operations developing and operating such parks. A summary and decision making. The private sector is best of the business models adopted by the individual suited for customer facing services and can commit IT parks covered as part of the exercise has been to service level agreements with the park occupants. presented in Figure 14. The success of any IT Park is measured by its ability to attract world class occupants and retain Based on the case studies it is observed that govern- them by providing services as per their expecta- ment is best suited to facilitate the development of tions. Private sector IT Park management organiza- IT Parks, rather than developing and managing IT tions are also capable of providing a number of Parks themselves. value added services to the occupants, such as support for marketing, recruitment support, access Government can facilitate IT Park development in to external finances such as venture capital and the following ways: business angels, establishing networks with other companies and/or universities, developing business Create enabling infrastructure, such as connect- plans, and business education and training. These ing roadways, main water supply lines, and services are usually availed by the small & medium constructing sewerage and drainage lines to the enterprises in the IT Parks as well as those availing IT Park. incubation facilities. This also helps the govern- Help park developers acquire land. Typically, ment's objectives in encouraging SME sector development of IT Parks requires huge chunks development in the IT sector. of land. It is very difficult for the park develop- ers to buy such large chunks of contiguous land Figure 14. Business Models for IT Parks Management ownership Government ppp private Government Hubli-india: Facilities owned and managed by provincial government public private cyberjaya-Malaysia: Services Hitec-india: PPP with provincial partnership (ppp) provided by respective government government, majority ownership utilities and management with private sector private Zhongguancun-china, taedok Science park-Singapore: Valley-Korea: Build to suit by private Primarily multi-occupant buildings, sector; urban infrastructure managed managed by ascends. by local government IT Parks: What Has Worked and What Has Not 47 .11 Returns from IT Park From the perspective of government policymakers, the major component of return from IT Park Investments investments includes: Based on the case studies covered as part of the Direct returns on core and ancillary IT Park study, it is observed that returns for IT Park investments in cases of government making developers can comprise two components: investments, either on its own or in partnership with the private sector. Returns from the core IT Park infrastructure includ- Returns in the form of direct and indirect taxes ing multi-occupant buildings and build-to-suit on incremental income generated by both facilities for large anchor investors, which usually companies as well as their employees. As will be accrue to the developer in the form of a one-time discussed in the subsequent section on impact of sale/lease payment, followed by periodic charges policies on IT sector development, many govern- levied on occupants for facilities management ments usually provide various fiscal concessions services. In other cases where IT Park facilities are on this front during the initial period to ensure offered on rent, the periodic payment also has an sustainable viability of the sector in the medium additional component towards facilities manage- to long term. ment charges. While the usual returns from core Positive spillover to other sectors through IT Park facilities vary from country to country, it generation of additional employment opportu- is observed to range between 15%­20 % per nities; higher per capita income manifesting in annum. Sample return computations for a multi- higher spending in sectors like retail and real tenanted building, which is a part of Hitec City, estate, which in turn lead to generation of Hyderabad, and CFZ Malaysia, have been further employment. Specific examples of such presented in Appendix 1 to this report. spillover effects in the context of the IT Park Returns from ancillary infrastructure: In some of case studies covered during the exercise have the IT Parks like Hitec City, Hyderabad and been discussed below. CFZ, Malaysia, the IT Park developer is also Increase in employment: L&T Infocity mandated to develop ancillary infrastructure like estimates that for Hitec City, Hyderabad, for retail and residential complexes, hotels and every job created in the IT sector, an exhibition centers. The returns from these additional four non-IT related jobs have investments are usually higher than returns on been generated. core IT Park infrastructure about 20%­25%. Retail investments: In many countries, growth Appendix 2 details indicative computations of in IT sector has lead to the growth in retail returns from investments in residential com- sector. For example, in developing countries plexes by IT Park developers in Hitec City, like India, organized retail has grown at the Hyderabad, as well as CFZ, Malaysia. rate of 25%­30% for the last 3 years (KSA Technopak Study on Retail Sector in India). Consequently, many governments encourage IT Park As per KSA Technopak Consumer Outlook developers to invest in a combination of core and survey, 2004, an average Indian urban ancillary IT Park infrastructure, so that the overall household spent more than 20% of family returns on their investments are adequate. This does income on recreational services/goods such as not however alter the risk perception of the project, movies and theaters, books and activities, as both components are inter-dependent with and eating out in 2004, which was much less demand for ancillary infrastructure being directly than in the early 1990s. One of the reasons linked to the level of success of the IT Park. It is also for such growth was the growth in the IT observed that one of the primary tools used by sector and the corresponding higher per policymakers for ensuring viability of core IT Park capita income. In CFZ, the presence of the investments is allotment of land at subsidized rates IT companies and the residential areas to than that allowed for residential and/or commercial accommodate IT sector employees created end use. This has been the case for most of the IT more demand for retail products. Such Parks developed through public private partnerships demand led to construction of more than like CFZ Malaysia and Mindspace, Hyderabad. 32,000 sft. of commercial space to accom- 8 International Good Practice for Establishment of Sustainable IT Parks modate retail outlets, supermarkets, food The other significant spillover effect is the skill outlets, bookstores, etc. development of the local population. Given the Real estate: The growth of IT sector fuels the requirement of skilled local resources by IT Park growth in real estate sector. For example, in occupants, the local educated population acquire the Cyberjaya, 2.2 million sft area of office space necessary skills required to gain employment has been constructed and occupied by more through taking courses in colleges, universities, or than 325 companies between 1999 and 2005. computer training institutes. Organizations also A number of such facilities constructed are have their own training/skill development programs multi-tenanted buildings like Century which further help the local employees develop Square-Phase 1 & 2 (around 0.5 m sft), skills. For example, for its Vietnamese operations Enterprise 1 (around 98,000 sft), Enterprise scheduled to begin in 2009, Intel has already 2 (around 72,000 sft), Enterprise 3 (110,000 recruited engineering graduates from local colleges sft) and Cyber Garden (56,000 sft), which and has sent them for on the job training to their accounts for around 1 million sft. Also, Chinese and Malaysian plants for ensuring that they around 70,000 sft of incubation has been acquire the necessary skills to operate the constructed. Moreover, 3600+ residential Vietnamese facility once it commences. houses, bungalows and apartments, account- ing for more than 4 million sft have been constructed between 2000 and 2005. An additional 2000 residential houses are under .12 Key Learning from the construction, and will be delivered within the Case Studies next 2 years. It is estimated that more than 7 m sft. space was constructed in Cyberjaya As is evident from the individual case studies, there Flagship Zone between 1999 and 2005. are significant differences between the objectives underlying setting up of individual IT Parks. For In addition to the above, other spillover effects example, the primary objective underlying Taedok observed on local economies from establishing IT Valley in Korea and the Singapore Science Park was Parks include technology transfer and skill develop- better collaboration between academia, research and ment of the local human resource. development institutes, and industry players for introducing new and disruptive technologies. On In IT Park context, technology transfer occurs when the other hand, most of the IT Parks in countries a local IT company partners with a global IT like China and India are guided by the primary company and commences operations in the IT Park. objective of generating more employment. Given The occupant entity could either be a local IT firm the diverse objectives, it becomes difficult to assess having a technology transfer agreement with a global the relative performance of individual IT Parks other major or a joint venture entity with shareholding than parks like the IT Park in Hubli, India, where between a domestic player and a global player. While underperformance is obvious. Nevertheless, based the global player contributes with technical know- on the case studies, we have attempted to identify how, design and drawings, etc., the local partner representative critical business success factors that provides knowledge about the local conditions and have impacted the performance of IT Parks, markets, and access to local skills and resources. It is irrespective of geographies. generally found that where proprietary know-how requiring intellectual property rights protection is required, global players prefer to operate through Having the right product-services mix wholly owned subsidiary entities, which allow them is critical to retain complete management control over the local Most of the parks that have not underperformed entity. For example, in case of the Saigon Hitech Park have by and large focused on products and services in Vietnam, Nidec of Japan (computer hardware where their countries of operation have a competi- components) and Intel (computer chip assembly & tive edge. Thus, Hitec City in India is focused testing facility) have set up/in the process of setting primarily on IT & BPO services, while ZSP in up operations as occupants of the IT Park through China has EDP & office equipment, software wholly owned subsidiary companies. (China-centric in the form of word processor and IT Parks: What Has Worked and What Has Not 49 digital publishing) and IT services as focus areas of Promoting investments through appropriate its occupants. Similarly, most of the ventures in financial and tax incentives, together with Taedok Valley have basic and advanced telecom- efficient and user-friendly processes for imple- munication as their primary focus. The only menting the policies. exception is Cyberjaya in Malaysia, which appears to Facilitating capacity building by encouraging have IT & BPO services as the primary revenue mobility of skills, appropriate employment earner for its occupants, contrary to Malaysia's policies, and extending financial support to traditional strength of assembling of EDP & office select capacity building initiatives. equipment. Malaysia's annual IT & BPO services exports during 2004 was estimated at USD$120 Examples include the Malaysian and Indian million and USD $40 million respectively, which is governments, both of which have adapted the single- significantly lower than market leaders like India, window mechanism for providing requisite approv- Ireland, and Canada. The average salary levels in als to IT sector companies through the Multimedia Malaysia are also more than twice those of India and Development Corporation and STPI respectively. China, although they are around 30% of near-shore locations like Ireland. Given that the revenues are primarily being driven by captive shared services and World class physical and virtual data centers of global companies, this seems to be a infrastructure represents bare conscious strategy of leveraging its not-so-distant necessities location and cost advantages, viz. a viz. primary It is amply clear from the case studies that physical outsourcing customers in the United States and infrastructure like roads, urban infrastructure and Europe. social amenities for recreation, sports, proximity to airports, and virtual infrastructure in terms of state- of-art data and voice connectivity are absolutely A supportive and proactive essential prerequisites, even though they may not government is key serve as competitive differentiators as far as IT Parks Each of the case studies underlines the importance are concerned. In fact, weaknesses in this area have of the role of government in development of been identified as one of the primary reasons for the successful IT parks. The extent of government underperformance of the IT Park at Hubli. involvement has varied in individual countries, with the government also acting as an investor, promoter and playing a key role in managing the park in A judicious mix of anchor occupants countries like Korea, China, in addition to its and smaller companies helps traditional role of regulator and facilitator. On the Most of the parks that have done reasonably well other hand, countries like Singapore have gradually have a mix of large credible domestic and global moved to a model wherein development and companies and relatively smaller local companies management of IT parks are primarily carried out (including start-ups) as occupants. While Taedok by the private sector, with the government ensuring Valley has many of the South Korean chaebols as a conducive policy environment. The relatively late anchor occupants, the large occupants at Hitec City, entrants like India, Malaysia, and even some of the India, include global majors like GE, Microsoft, more recent parks in China, like the Dalian IT Park CSC, Verizon in addition to Indian multinationals are based on this model. Even countries like Korea like Infosys, TCS, and others. ZSP also has a mix of are gradually moving to a model where the private large international and domestic occupants, such as sector, including foreign investors, is likely to play a Microsoft, IBM, Intel, Legend Group, and Stone major role in the promotion and management of IT Group. Singapore Science Park's list of reputed parks. Nevertheless, the government is expected to occupants include Lucent, Silicon Graphics while continue to play a key role in terms of formulation CFZ, Malaysia has been able to attract reputed of appropriate policies for: companies such as Dell, HSBC, IBM, and Shell. The only exception is the IT Park, Hubli, which Encouraging innovation through financial and only has small local companies as its occupants, non-financial measures, including protection of which is possibly one of the reasons behind its intellectual property. underperformance. 0 International Good Practice for Establishment of Sustainable IT Parks While development of the domestic IT sector services like establishing networks with other definitely constitutes one of the key objectives for companies and/or universities, support for market- most IT Parks, having large, established companies ing, recruitment support, access to external finances as anchor occupants enables reduction of opera- such as venture capital and business angels, and tional risks and uncertainties, and facilitates industry developing business plans and business education cluster effects. These large players primarily leverage and training. This helps in developing entrepre- the infrastructure of the park and use their own neurship, and the SME sector in the domestic management and technical bandwidth to replicate economy and the IT Parks gains when these their success in other locations. Consequently, many operations scale up to become regular occupants of the successful parks have adopted a strategy to of the IT Parks. acquire critical scale by inviting these larger players, while supporting the relatively smaller companies (including start-ups) through value added services Linkages with Centers of Excellence like business incubation. are critical for select products and services, while skill linkages are Availability of angel investment, essential for all types of products and venture capital and private equity services Close working relationships with academic institu- financing are essential pre-requisites tions such as universities and colleges and R & D Angel investment, venture capital and private equity institutes are essential for parks like Taedok Valley, have been identified as key enablers, specifically for Singapore Science Park, ZSP, where the primary focus development of start-ups and small & medium of some key occupants is on technology innovation in enterprises. Consequently, in countries like Korea the areas of EDP equipment, telecommunications, and China, where the presence of global angel integrated circuits & electronic components. The investors/venture capital/private equity funds is nature of requirements require leveraging of special- limited, IT parks like Teadok Valley and ZSP have ized R&D infrastructure for areas such as basic and set up their own dedicated venture capital funds, applied research and prototyping, which are usually usually administered by government agencies/ available with prominent academic and R&D bodies. In addition, most successful parks have institutes. Consequently, many of these parks have business incubation centers for supporting start-ups attempted to facilitate linkages between these and small companies. However, irrespective of the institutions and industry players by co-locating them. venture capital/private equity set up of the indi- For example, KAIST and ETRI are located within vidual park, infusing the requisite depth to the Taedok Valley, Quinghua University, Beijing venture capital/private equity market at the country University and the Chinese Academy of Science are level is also essential, as it enables transfer and occupants of ZSP and institutes like the Center of sharing of good practice. Singapore, India and Wireless Communication and the Institute of China represent some of the countries that have Microelectronics are located within the Singapore been able to achieve an extent of success in this area. Science Park. On the other hand, such linkages are usually not as Providing Incubation facilities in the critical in IT & BPO services where innovation park is key requirements are usually based on service delivery Other than providing general office space and around existing software & hardware products and utilities, providing business incubation facilities is most market leaders possess the requisite competen- one of the key distinguishing factor of IT parks. cies in-house. Through provision of incubation facilities, IT Parks foster innovation through supporting commercial- However, for both the above categories of compa- izing of business ideas, by supporting entrepreneurs nies, availability of quality manpower resources is and providing world class quality infrastructure like key to success and hence dictates the performance of telecommunication services, conference facilities the IT park. Consequently, many of the IT parks and office space. They also provide value added have been set up in close proximity with prominent IT Parks: What Has Worked and What Has Not 51 academic institutions and centers of learning. In marketing exercise launched by the private sector addition, factors such as existing infrastructure & promoters L&T Infocity. The initiative of the amenities and employment regulations play a key management team emerges as a key differentiator role in attracting the right competencies from other not only at the time of marketing the park but also locations. during subsequent operation, particularly for start- ups and smaller companies, which are at times dependent on them for the required market and A vibrant and pro-active IT Park financing linkages. To this end, some IT park management team represents an management companies like Ascendas have established relationships with organizations added advantage specializing in areas such as business planning and In addition to having the right infrastructure and market assessment. and offer these services to linkages, the relative performance of an IT park is occupants. It has also been observed that the private also dependent on the competence and level of sector inevitably has an advantage on this front, as initiative of its management team. Consequently, it has requisite practices in place to reward (or parks promoted and managed by groups/companies penalize) the respective management teams with requisite expertise have been found to outper- depending on their performance, unlike govern- form others. For example, Phase I of Hitec City was ments in most developing countries where perfor- fully booked within 4 months of commencement of mance based management is still in its initial stages. construction, one of the reasons being the extensive 2 International Good Practice for Establishment of Sustainable IT Parks Chapter 4 It Sector: Policies and their Impact .1 Introduction sector and IT Parks, a categorization of the indi- vidual policy instruments becomes essential. For purposes of the current study, relevant government As in most other sectors, government policies and policies and interventions have been grouped into interventions have played a key role in the develop- the following categories. ment of the IT sector in individual economies. The relocation of leading defense contractor Lockheed to Fiscal policies that primarily represent the the Silicon Valley in the fifties, thereby bringing in different financial concessions and benefits significant orders and leading to creation of a large offered to players in the IT sector. number of ancillary technology firms represents one Policies aimed at encouraging innovation, and of the earliest instances of government playing a research & development, areas which have crucial role in development of IT Parks. As has been traditionally formed the backbone for the discussed in the case studies of individual IT Parks, development of certain segments of the IT similar models have been followed by governments sector. Some of these policies could involve in different countries such as Korea and Singapore. provision of financial concessions & benefits, as The role of government has also evolved over time in the case of fiscal policies. depending on the level of maturity of the sector. Human capital-related policies, primarily Consequently, while government institutions/ intended to facilitate availability of requisite organizations in many countries have played a direct human resources, which constitute one of the role in facilitating development of the sector in the key enablers for development of the IT sector. initial stages, the government has shifted to a Policies impacting the investment climate of the facilitation role once the sector has attained critical country, which are aimed at making the mass, with much of the subsequent growth initia- economy attractive to domestic/international tives being private sector led. investors through a combination of policy measures and instruments. Most government The current section highlights key findings of an policies and interventions in this category, while assessment of the impact of government policies, they may be tailored to meet the specific institutional and implementation mechanisms on requirements of a particular sector like IT, are the development of the IT sector in general, and IT usually targeted at meeting socio-economic Parks in particular. In addition to direct interven- objectives through all round economic growth. tions in the IT sector, we have also attempted to carry out a high level analysis of government policies A detailed description of the key policy instruments and interventions targeted at i) other sectors such as in each of the above categories, together with physical infrastructure and telecommunications, suitable illustrations, has been presented in Figure which usually play a key role in development of the 15 on the next page. IT sector and ii) facilitating spillover effects from the growth of the IT sector to drive overall socio- economic development. . Fiscal policies .2 Framework for analysis China Under the Policies for Encouraging the Given the different types of government policies and Development of Software Industry And interventions impacting the development of the IT Integrated Circuit (IC) Industry framed by the IT Sector: Policies and Their Impact 53 Figure 15. Types of Government Policy Instruments broad classification Key policy instruments illustrative interventions Fiscal policies direct tax concessions and waivers Income tax holidays, concessional tax rates, simplified return filing provisions, special tax exemption Indirect tax concessions and waivers Customs duty exemption on exports and imports, service tax conces- sion, sales tax waivers Subsidies, grants, incentives and Capital subsidy, subsidies on land, power & telecom tariff, interest other financial support expenses innovation policies research and development direct funding through strategic r&d grants & patent incentives, devel- (r&d) support opment test bed facilities, tax break on r&d expenses Intellectual property rights (IPr) legislation and implementation mechanisms for protecting products, protection copyrights and trademarks Providing incubation facilities Support schemes for start-ups and SMes offering plug & play facilities and services and other incubation services. Human capital policies Formulating educational policies & Making changes in curriculum based on It sector requirements, allow- curriculum with a focus on It ing private investment in education with requisite quality checks sector requirements Supporting training & capacity government sponsored/supported programs for developing and building initiatives enhancing skill sets of It work force Facilitating employment creation Subsidies linked to job creation, policies to attract foreign experts, and attracting talent relaxed visa regulations and labor market policies investment climate policies Simplified institutional and declaring It as a "priority sector" resulting in preferential treatment and implementation framework efficient policy implementation mechanisms, single window clearance facilities, investment facilitation services Facilitating cross-border investments, Favorable export import policies, free trade agreements, double taxa- trade in products and services tion avoidance agreements, permitting foreign direct investments (FdI) with profit repatriation enabling development of legislations for recognizing legal validity of digital signatures & trans- e-Commerce/e-government actions, responsibility of service providers, incorporating cyber crime into existing penal provisions Venture capital (VC)/private government sponsored VC funds, transparent & well regulated finan- equity market development cial services sector with special fiscal concessions/benefits for attract- ing global VC/private equity investors Facilitating development of allowing competitive development of physical (roads, airports, urban enabling infrastructure, leveraging infrastructure) and telecommunications infrastructure, flexible land use spill over benefits policies State Council, a maximum tax rate of 10% is computer software till 2010 and a higher rate applicable for key software enterprises identified (60% compared to 15% for plant, machinery by the state against the normal tax rate of 30%. and equipment) of depreciation on computers A number of government bodies, including the and software. Ministry of Foreign Trade and State Bureau of Software Technology Parks of India (STPI), an Taxation, decide which enterprises are eligible autonomous organization under the aegis of for this. Ministry of Communications and Information Software enterprises importing capital equip- Technology, government of India offers a ment as well as technology (including software) number of concessions to STPI registered IT are exempt from payment of customs duties and and BPO units like 100% import duty exemp- import Value Added Tax (VAT). tion on capital goods imports, reimbursement of Central Sales Tax (CST) paid on capital goods India purchases from the Domestic Tariff Area (DTA). The Income Tax Act, 1961, offers a number of Many state governments have started the incentives to IT and ITES companies, including practice of extending various financial conces- a 100% exemption on profits from export of sions/benefits linked to the level of employment International Good Practice for Establishment of Sustainable IT Parks creation. For example, government of Andhra support to local companies through Directors Pradesh offers a rebate of USD$450 on the land and Advisors for Technopreneurial Enterprise cost for every job created provided at least 333 Scheme and the Enterprise Investment Incentive jobs are created per acre of land. Scheme. Given India's federal structure, a number of state/provincial governments also offer additional Korea financial incentives to IT and BPO units setting The Corporate Income Tax Law gives special up operations in the region. Typical incentives breaks to the IT sector under the aegis of Tax offered include capital investment and interest Incentive Limitation Law (TILL) for foreign subsidies and subsidies on electricity tariff. invested companies involved in advanced technologies. Benefits include a 100% exemption Malaysia from corporate income tax for 7 years from the Under the Income Tax Act, 1967, 70% of the first year in which profit was generated or the 5th income from software development is exempt year of operations, whichever is earlier. For the from tax for a period of 5 years. next three years, the income tax exemption is Additional benefits are offered to companies applicable to 50% of the profits. Additionally divi- located in designated IT Parks like the Cyberjaya dends are exempt from dividend withholding tax. Flagship Zone. Companies in such areas are The Tax Incentive Limitation Law (TILL) grants eligible for 100% of their income being exempt exemption from custom duties, VAT, special from tax for the first 10 years, 100% deduction excise tax to the companies set up with foreign on approved capital expenditure incurred during investment. Such companies also get up to the first 5 years of operation, and duty free 100% (prorated on the foreign ownership ratio) import of multimedia equipment. exemption from the aggregate land tax for the The government of Malaysia allows duty free first 5 years of operation and up to 50% for the import of multimedia equipments to the IT subsequent 3 years companies. The government of Malaysia also offers grants A comparative summary of the fiscal policies of indi- and subsidies to start up companies and local vidual countries has been presented below. SMEs to meet various expenses through the Small and Medium Industries Development Corporation (SMIDC) of Malaysia. For instance, 50% of the cost of business planning . Innovation policies and feasibility studies and 50% of the cost of upgrading production & design capabilities are China reimbursed as grants. The Policies for Encouraging the Development of Software Industry And Integrated Circuit (IC) Singapore Industry framed by the State Council provides Under the Singapore Income Tax Act, IT incentives for software enterprises to invest in companies with "Pioneer Status" enjoy a 100% research & development. Any amount exceeding exemption from corporate income tax for the 3% of VAT paid on sale of software products are first 5 to 10 years of operation. In addition, refunded to the company provided the amount companies with export revenues in excess of is used in research & development. 20% of total revenues are eligible for tax Patent Law of the People's Republic of China exemption on export profits. was amended in 2000 with patent right for The Economic Development Board (EDB) of inventions being valid for 20 years and the Singapore runs a number of schemes to support patent rights for utility models and designs local IT companies like the Start-up Enterprise valid for 10 years. The Copyright Law was Development Scheme (SEEDS). Under this revised in 2001 to include `computer software' scheme EDB provides equity support to a start under the definition of `works' enjoying up company by subscribing up to 50% of its copyright, with the copyright being valid for share capital subject to a maximum investment fifty years. The Trademark Law, revised in 2001, of USD$300,000. EDB also provides managerial IT Sector: Policies and Their Impact 55 Figure 16. Fiscal Policy Highlights for Different Countries china india Malaysia Singapore Korea direct tax concessions reduced income Income tax holiday 100% tax exemp- 100% tax exemp- 100% Corpo- & waivers tax rate of 10% on profit from tion for MSC tion for pioneer rate income tax for key software exports Status companies status companies exemption for 7 enterprises identi- Higher rate of for 10 years tax on profit from years fied by the state depreciation 100% deduction export of services 100% on computers & on capital expen- exempted exemption software diture from dividend It Parks under the withholding SeZ policy enjoys tax, for foreign 100% It break for investment in 5 years, 50% tax technology exemptions for next five years and up to 50% of the prof- its ploughed back for next 5 years Indirect tax concessions no customs duty free imports duty-free import exemption from & waivers duty and import by StPI units of multimedia custom duties, Vat for software CSt reimbursement equipment Vat, special companies on purchases from excise tax, for importing capital dta companies set equipment includ- up with foreign ing technology. investment Subsidies, grants and rebate in cost 50% cost of feasi- equity support other financial support of land by state bility studies and for start-up enter- governments business planning prises under the Subsidy for creat- to SMes Seeds scheme ing >2000 jobs states that the period of validity of a registered and development. For example, the govern- trademark shall be 10 years. The above amend- ment of Andhra Pradesh as part of its IT Policy, ments are in compliance with WTO's 2005­2010, offers free space for 5 years to Agreements on Trade-Related Aspects of companies engaged in "high-end R&D" Intellectual Property Rights (TRIPS). together with requisite software tools. Under Additionally the Measures for Administrative this policy, the cost of filing patents are also Enforcement of Patent promulgated by the reimbursed to companies based in the state. State Intellectual Property Office of China in The Indian Copyright Act, 1957 was amended 2001 aims at effectively resolving patent in 1994 to include computer programs under infringement and other related disputes. the definition of "literary work" and any China has a network of incubation centers which infringement of such copyrights was made a are usually set up in partnership between the penal offence. The amended Copyright Act is municipal/local government and domestic based on the Agreement on Trade Related venture capital investors. Almost all IT Parks Aspects of Intellectual Property Rights (TRIPS) have incubation facilities for start up/early stage and provides for a Copyright Tribunal and a companies. copyright protection period of 60 years. STPI, under the Ministry of Communications India and Information Technology, provides incuba- Given India's federal structure, a number of tion facilities in each of its 49 centers spread state/provincial governments offer IT compa- across the country, with plug & play facilities, nies additional incentives linked to research shared services support. International Good Practice for Establishment of Sustainable IT Parks Malaysia EDB runs an island wide network of incubation The Ministry of Science & Technology centers named "Hub of Technopreneurs" Industries (MoSTI) operates a number of (HOTSpots), which provide workspace and schemes to promote innovation among local IT services like shared administrative resources, companies. Schemes like the Industry Research assistance in fund-raising and marketing, and and Development Grant Scheme (IGS), MSC general mentoring and guidance. The National Research and Development Grant Scheme Science & Technology Board acts as an advisory (MGS) and Demonstrator Applications Grant board to companies operating from these Scheme (DAGS) offer up to 70% subsidy on incubation centers. R&D project costs. The Commercialization of R&D Fund (CRDF) has also been set up to Korea support commercialization of R&D products The Korean Tax laws permit up to 7% of the from market survey to product launch. investments incurred in R&D and man-power The Copyright Act, 1987 was amended in 1999 development as tax deductible expenses. Up to to include computer programs under the 50% of the income from technology transfer by definition of "literary work" and any infringe- the patent holder is also exempt from income ment of such copyrights was made a penal tax. offence. The amended Copyright Act is based on The Korean government provides matching the Agreement on Trade Related Aspects of grants to original investments by foreign Intellectual Property Rights (TRIPS) and companies in R&D centers in the country provides for a Copyright Tribunal and a copy- through special support funds set up for the right protection period of 50 years. purpose. Ministry of Information & The Techno-preneur Development Flagship Communication and Ministry of Science & (TDF) program was initiated to support local Technology supervise and operate similar funds entrepreneurs through various incubation to provide financial support for R&D pro- services. The National Incubation Network grams. (NIN) under this program includes a country- In 2000, the Copyright Act, the Computer wide network of incubation centers for start-ups Program Protection Act, and the Trademark act and early stage companies. have been amended to comply with the TRIPs agreement. In addition, a Standing Inspection Singapore Team (SIT) has been set up under the Ministry Under the Income Tax Act a number of tax of Culture & Tourism and Ministry of incentives related to R&D are offered like Information & Communication, to work with double deduction of all expenses related to R&D Ministry of Justice to intervene on various IPR and exemption of withholding tax of royalty or infringements technical fees paid to non residents. The Small & Medium Business Administration The Economic Development Board (EDB) of (SMBA) provides a single-point support Singapore, through a number of schemes like the mechanism to the Small & Medium Enterprises Innovation Commercialization Scheme (ICS), in areas such as human resources, marketing, Innovation Development Scheme (IDS) and and innovation. SMBA also supports organiza- Technology Capability Upgrading Scheme, tions like the Korean Business Incubation offers grants to support R&D activities. Under Association set up by incubators and incubation the Research Incentive Scheme for Companies tenants to support and facilitate technical (RISC), EDB reimburses cost incurred on commercialization and marketing activities of training, investment in equipment and profes- incubators and incubation tenants. Almost all IT sional services related to R&D projects through Parks have incubation facilities which are usually grants. supported by the provincial/local Government The Copyright Act was amended in 1999 to and academic institutions for start up/early stage harmonize it with key provisions under TRIPS. companies. The amended Act provides for a 70 year protection for copyrights and setting up of a A comparative summary of the innovation policies Copyright Tribunal to adjudicate IPR violations. of individual countries has been presented below. IT Sector: Policies and Their Impact 57 Figure 17. Innovation Policy Highlights for Different Countries china india Malaysia Singapore Korea research and any amount Free space, soft- Up to 70% cost 200% deduction Special r&d development support exceeding 3% ware tools& patent of r&d projects on r&d expenses promotion funds of Vat paid on cost reimbursement reimbursed under r&d grants under tax credit for sale of software for high end r&d IgS, MgS and rISC, ICS, IdS expenditure & products to be re- companies at state dagS schemes investment in funded provided level CrdF to support r&d facilities it is used for r&d 100% It deduction r&d investments tax exemption on capital expendi- from technology ture with respect to transfer income scientific research Intellectual property Patent law and amended Indian amended Malay- Copyright act in amendments to rights protection Copyright & Copyright act in sian Copyright line with trIPS Copyright act, trademark laws conformity with act in line with Computer Pro- revised in line trIPS trIPS gram Protection with trIPS. act & trademark act in line with trIPS Providing incubation almost all It Parks government run national Incuba- edB runs 7 Hot- facilities & services have incuba- country-wide tor network Spots incubation Small & Medium tion facilities incubation centers (nIn) under the centers, with Business admin- supported by under StPI tdF program management sup- istration along provincial/local sponsored by port from nStB with KoBIa government & government provides SMe & academic institu- start-up support tions . Human Capital Policies India Education is a concurrent subject in India, with China both the central (federal) and state (provincial) The Law on Science and Technology Progress exercising control. Consequently, a number of (1993) and Law on Popularization of Science state governments have initiated changes like and Technology (2002) enacted by Ministry of compulsory introduction of English at primary Science and Technology encourage enterprises to level with a focus on emerging BPO sector cooperate with research & development trends, setting up specialized units under the institutes to increase their capabilities. The education department for tracking emerging government has included in its policy the trends in the IT sector and planning changes in responsibility of school and educational institu- the curriculum. tions to make science and technology education A number of state (provincial) governments also an essential part of the curriculum to popularize support training & development initiatives with the same among students and teenagers. a focus on meeting the manpower requirements The government has recently allowed entry of of the IT sector. For example, the government of foreign players into higher education on a case by Andhra Pradesh has set up Jawahar Knowledge case basis. For example, the Indian IT training Centers in all 23 districts of the state with the company NIIT is in the process of setting up a support of industry associations and corporate network of centers for providing training in entities to impart focused technical and soft programming & spoken English to graduates. skills to engineering graduates with a focus on Chinese visa regulations are fairly simple and the IT sector. The government of Karnataka runs allow long term multiple entries from most of 220 training centers all over the state with the the countries based on valid letters of invite from curriculum focused on different types and levels business partners in China. of IT and BPO skills. 8 International Good Practice for Establishment of Sustainable IT Parks Visa regulations in India have been simplified for international universities have their campuses in facilitating easy movement of professionals from Singapore. The education curriculum at school other countries. India has also entered into a and graduation level have been adapted to suit number of bilateral agreements with countries technology based industry. For instance com- like Singapore (a Comprehensive Economic puter education has been made compulsory in Cooperation Agreement was entered in 2005) schools. As are result a huge pool of English for easy mobility of professionals between the speaking IT resources is available in Singapore. two countries. The Ministry of Education (MoE) in partnership with IDA runs a number of training programs Malaysia like Infocomm Training Framework (ITF) to The 2nd National Science & Technology Policy train different segments of the population and identifies development of human resources Critical Information Resource Program capacity & capability as a key thrust area for (CITREP) to train IT professionals in latest science & technology (S&T) development. A industry skills. number of specific measures have been suggested Singapore has a policy for enabling easy entry for in terms of achieving a specific proportion of skilled foreigners through its Employment Pass/ students pursuing S&T courses to those Center Pass schemes. Foreign entrepreneurs pursuing other streams at the upper secondary wanting to promote businesses in Singapore level, including setting up a post-graduate S&T need to apply for "EntrePass", an employment research university, introduction of financial Pass for foreigners. The application procedures incentives for students pursuing S&T, expanding are quite simple. A successful applicant can the operations of the S&T Human Resource register the new business on the basis of this Development Fund, making academic curricula pass. In addition to easy visa procedures, the more hands-on & innovation oriented, and country has entered into bilateral agreements strengthening mechanisms for allowing industry (typically referred to as Comprehensive to contribute to curricula development. Economic Cooperation Agreements) with a Different training programs and institutes offer number of countries for facilitating easy training programs to improve the available skill movement of professionals. sets in line with industry requirements. For example, the MSC K-Workers' Development Korea Institute was set up by the Ministry of Education The Korean government developed the `Basic with the mandate of matching the demand and Framework for National Human Resource supply of knowledge workers. The government, Development 2001' for creation of a knowledge under the 2nd S&T Policy, has initiated measures based society. The government has also imple- for strengthening the existing system of certifica- mented plans like `Adapting ICT into Education tion of technical personnel & classification of Master Plan-I, 1997­2001' and `Adapting ICT skills, expanding the operations of the Skills into Education Master Plan-II, 2001­2005,' Development Fund to finance industry training which focus on fully utilizing & integrating ICT programs, allow joint management of the fund by into the National Curriculum in elementary and the private sector and leveraging existing facilities secondary school education. The government has at industrial training & other institutes. also adopted `the e-Campus VISION 2007' to In addition to these, the government has taken encourage the use of ICT in university education up a number of initiatives like relaxed visa and research. regime to facilitate mobility of resources. MDeC Both government and private sector organiza- is empowered by government of Malaysia to tions offer certification programs in the field of approve applications by companies to employ information and communication technologies. foreign nationals. The national certification system, implemented under the National Skills Certificate law is Singapore administered by the Ministry of Information and Over the years Singapore has developed an open Communication and Human Resources education policy inviting foreign universities to Development Service of Korea, under the set up campuses in Singapore. Currently 15 Ministry of Labor. Currently there are more than IT Sector: Policies and Their Impact 59 Figure 18. Human Capital Policy Highlights for Different Countries china india Malaysia Singapore Korea It focused Specific laws on Private sector 2nd S&t policy Computer educa- It literacy drive educational policies popularization participation focuses on making tion at school through '10 mil- & curriculum of and ensuring Compulsory eng- curricula more in- level lion informatiza- progress of science lish from primary novation oriented, existence of a tion program' and technology level in many states involvement of large number of eCampus entry of foreign private sector in international/for- Vision 2007 players in higher setting curricula eign universities for encouraging education on a use of ICt in case to case basis universities operations of Skills training & capacity r&d institutes It focused training development Fund ItF, CItreP run by Specialized building initiatives based in Beijing centers supported augmented under Ida and educa- organizations are encouraged to by various state 2nd S&t policy to tion Ministry such a nCa, run schools/train- governments support industry IIta, and etrI, ing institutes jointly training programs, for promoting with colleges, leveraging existing r&d in high universities and industrial training technology scientific research facilities institutes qualified MSC K-Workers' for training post- development graduates Institute set up by Finance Ministry Facilitating Simplified visa employment linked MdeC empow- Simplified visa Simplified visa employment creation regulations financial incentives ered to approve regulations regulations and attracting talent Simplified Visa visa/work permit entrepass for regulations applications foreigners setting up business 100 IT related certificates issued by industry illiterates, and the disadvantaged like the deaf associations or corporate groups. The govern- and the blind. ment from time to time recognizes certificates South Korean visa regulations are fairly simple issued by these private institutions as national and allow five year multiple entries from most of certificates. Currently over a million people have the countries based on valid letters of invite from been trained & certified under these schemes. business partners in the country. The government has over time created a strong network of support institutions to promote A comparative summary of the human capital research on e-learning, develop information policies of individual countries has been presented related to education and research like the Bureau below. of Educational Information & Technology (1996) under Ministry of Education and Korea Education and Research Information Services (KERIS,1999) . Investment Climate Policies In 2000 the `10 Million Informatization Program' was launched by the government of China Korea as an initiative to bridge the digital divide. The Ministry of Information Industry is In the same year the National Center for responsible for formulating and administering Lifelong Learning was set up under the aegis of policies for the development of China's IT and Lifelong Learning Act (March 2000) to carry out telecommunications sector at the Federal level. research, collect information, and provide At the local government level, the provincial/ training to instructors and administrators on municipal governments play a key role in areas ICT education with a focus on senior citizens, 0 International Good Practice for Establishment of Sustainable IT Parks such as overseeing development of the IT sector The DoIT has promulgated various legislations & IT parks in their respective regions and such as the Information Technology Act, 2000, managing local level venture capital funds. and the Semiconductor Integrated Circuits The country promulgated the Electronic Layout Design Act, 2000 as part of its initiatives Signature Law in April, 2005, for establishing to create a supportive legal framework for legal validity of electronic signatures and development of e-commerce in the country. It institutionalizing the process of issue and has also initiated the National e-Governance certification of digital signatures. program (NeGP) for adoption of IT to bring The role of private sector/foreign players in IT about improvements in citizen service delivery sector development is evident from the both in the Central Government as well as Memorandum of Understanding (MoU) entered individual states. Most of the large IT companies into between the State Development & Planning have benefited through significant additional Commission of China with Microsoft business by participating in NeGP. Corporation of USA in 2002. This is an all The state (provincial) governments also offer encompassing MoU under which Microsoft will additional benefits & concessions through their assist China in facilitating development of the respective Departments of Information IT sector besides committing investments of Technology/nodal agencies. Many states have USD$750 million over a three year period. declared the IT & BPO sector as "essential China has three main stock markets viz. services" to provide additional operational Hongkong, Shanhai & Shenzen Stock Exchange flexibilities to companies in these sectors. with 1164 ,837 and 569 companies listed in the India has a developed and well-regulated respective stock exchanges. The Hang Seng is the financial services sector, including liquid and leading index for shares traded on the Hong vibrant capital markets in the form of Bombay Kong Stock Exchange. Started in 1969, the Stock Exchange and the National Stock index consists of the 33 largest companies that Exchange. There are a large number of interna- trade on the exchange. tional & domestic financial services players such In 2005, 44,019 foreign-invested enterprises as commercial banks, financial institutions, were newly set up in China, with a estimated investment banks, venture capital & private investment value of USD$72.406 billion In equity funds, stock brokers, and foreign institu- China FDI is allowed in a number of sectors tional investors. A number of international including retail, software and electronics. Many venture capital/private equity funds such as the foreign players are present in the IT sector Carlyle Group, the Blackstone Group, and including Motorola, Samsung, Langchao, and General Atlantic Private Equity operate in the LG. (Source: www.fdi.gov.cn). country, in addition to domestic players like China is a signatory to a Treaty for the ICIC and Kotak Bank. To encourage venture Prevention of Double Taxation with over 65 capitalists to invest in India, dividend income countries all over the world. Among them are and long term capital gains from investments in major IT markets like USA, UK, France, a VC undertaking are exempted from tax. The Germany, and Japan. Securities and Exchange Board of India, the regulatory body for Indian capital markets in its India Guidelines for Venture Capital has laid down the At the central (federal) government level, the regulations governing venture capital funds in Department of Information Technology India on listing and inviting public subscription (DoIT), Ministry of Communication & for enterprises funded by VCs. Information Technology, government of India is While the country lags behind in key ICT responsible for formulating specific policies and indicators, large cities have access to world class promoting the Indian IT sector. It has formu- telecommunication infrastructure. Significant lated and administers a number of schemes like competition exists in most of the sectors (roads, STPI, Electronic Hardware Technology Park airports, telecommunications), which usually (EHTP), Export Promotion Capital Goods play key supportive roles in IT sector develop- Scheme(EPCG) for providing various ment, with both government and private sector incentives & concessions to IT companies. players being present. IT Sector: Policies and Their Impact 61 India has double taxation avoidance agreements in partnership with private sector has invested (DTAA) with various developed and developing heavily in building a high speed network (10 countries such as the U.S., the UK, France, Gbps) that connects MSC with Japan, ASEAN, Germany, China, Brazil, Malaysia, and South Europe, and the U.S. Africa. While there are FDI restrictions for some of the Singapore sectors like retail, which usually are key benefi- In Singapore, IT was identified as a core sector ciaries of IT sector spill over effects, 100% FDI as early as 1980 when the first five year is permitted in other sectors like real estate. With "National Computerization Plan" (NCP) was land use being a state (provincial) government formulated. The industry has been awarded subject, most of the state governments have "Pioneer Status". In addition to a number of allowed a combination of business, residential special financial incentives it enjoys privileges and commercial end use as far as IT Parks are like simplified compliance procedures. concerned, to enable maximization of spillover Infocomm Development Authority of Singapore benefits. (IDA), a statutory board of the Singapore government under the Ministry of Information, Malaysia Communications and Arts was formed in Malaysian Industrial Development Authority December 1999 to promote and develop (MIDA), the government's principal agency for Singapore's vibrant IT industry. The Singapore promotion and coordination of industrial Economic Development Board (EDB) acts as a development in Malaysia offers a number of nodal agency for administration of financial & fiscal benefits for ICT companies. IT companies other incentives across all industry sectors. engaged in software development are eligible to Since 1965, Singapore has entered into a be granted "Pioneer Status". Further to facilitate number of DTAAs with countries including investment in IT parks, Multimedia Australia, Canada, China, France, Germany, and Development Corporation (MDeC) was set up India. Over the years, Singapore has signed free to act as a single window clearance agency for trade agreements with countries like USA, Japan, prospective investors in MSC. India, Korea, Europe and others aiming to make The international trade policy of Malaysia is Singapore a services hub. designed to increase exports. Malaysia is part of In 1998, the Electronic Transactions Act (ETA) the ASEAN Free Trade Area (AFTA), established and Computer Misuse (Amendment) Bill were in 1992 to reduce/eliminate tariffs on intra- enacted to provide a legal foundation for ASEAN trade. Malaysian External Trade electronic signatures and to prevent potential Development Corporation (MATRADE) was set abuses of computer systems. up in 1993 to act as a nodal agency for local In April 2000, government of Singapore exporters and foreign importers. The country has removed restrictions on telecom licenses to intro- also executed DTAAs with 52 countries includ- duce full competition in the telecom sector. ing Japan, Korea, Germany, France, and the UK. The Singapore Stock Exchange (SGX) was formed The Malaysian Communications and in 1999, is the Asia-Pacific's first demutualized Multimedia Commission (MCMC) was created and integrated securities and derivatives exchange. in 1998 to regulate the ICT industry. SGX is at the forefront of exchanges globally in Communications and Multimedia Act, Digital attracting international issuers and is rapidly signature Act and Computer Crimes Act were emerging as Asia's offshore risk management promulgated in late 90s to ensure security and center for international derivatives. legality of electronic transactions. The government has embarked on a drive to Korea create robust infrastructure suitable for IT Government focus and emphasis on ICT is industry. With the privatization of the govern- evident from the number of white papers and ment telecommunications department in 1987 vision documents formulated by Ministry of and the formation of the National Information & Communication like `White Telecommunications Policy (NTP) in 1994 the Paper: Internet Korea 2005', `Broadband IT market is now fully liberalized. The government Korea Vision 2007', `IT839 Strategy 2004', 2 International Good Practice for Establishment of Sustainable IT Parks `Dynamic Digital Korea, White Paper 2004', `e- regional taxes, free lease of land in Foreign Korea Vision, 2006,' which envision Korea as Investment Zones and a negotiated Cash Grant the world leader in IT. to select companies. Korean government has enacted various IT Korea has DTAA with more than 60 countries specific legislations like `Act on Promotion of including India, China, Germany, and Russia. Information & Communication Network Utilization and Information Protection 2001', A comparative summary of the Investment climate `Act on the Protection of Information policies of individual countries has been presented Infrastructure 2001', `Electronic Signature Act in Figure 19. 1999', and `Protection of Communications Secrets Act 1993' to promote IT sector. The government has entered into agreements with . Key Findings countries like China and Japan for enhancing information security. The Korean government As is evident from the analysis of the regulatory and is implementing `Five-year Development Plan policy regime in different countries, most countries for Information Security Technology 2001­ have followed a consistent approach in terms of the 2005' and `Mid & Long-term Basic Plan for different types of policy interventions for the Information Security 2003­2007' for the development of the IT sector. However, the level of development of information security tech- direct government involvement varies across nologies. individual economies, with some governments The government has extended nurturing support adopting a facilitative approach while others have to eight technology based services, three crucial opted for direct interventions. For example, while infrastructures and nine new business growth the government of India has primarily depended on engines under its `IT839 strategy 2004' to ensure private sector venture capital/private equity invest- growth of the Korean IT industry. ments, China has opted for government-sponsored Large amount of public funds has been infused venture capital funds. In the current section, we by government to create a domestic venture capi- have attempted to identify key trends in policy tal market. Prominent examples of government development which appear to have an impact on the venture capital funds include `Small and performance of the IT sector. The six case studies Medium Business Fund(SMBF)' (which has also brings forth a number of policy initiatives initiatives like `Dasan Venture' and `Limited which facilitated the growth of IT sector in general partnership funds'), `The technology Credit and IT Parks in particular. In this section, we also Guarantee Fund,' and special funds such as `The provide illustrations of such policy enablers. Informationalisation Promotion Fund' and `The Science and Technology fund'. The government Adopting a holistic approach to policy has provided further support in form of legisla- tion allowing venture investments by banks, development is key providing tax incentives to VCs, and creation of As development of the IT sector and IT Parks is KOSDAQ for high technology start-ups. dependent on a number of other sectors like telecom- The Korean Stock exchange has a total number munications, roads, airports, venture capital/private of 729 listed companies as of November 2006. equity, capital markets, most successful countries The main tracking index is the Korean have put in place suitable policies for improving Composite Stock Price Index. The procedure for efficiencies and service levels in these sectors. Thus, buying stock on the Korean market is compli- countries like Singapore were one of the earliest to cated, especially for foreigners. An investor who put in place requisite policies for facilitating competi- intends to trade securities on the KSE market tion and private sector participation in telecommuni- must open an account with a KSE member cations and infrastructure and ensuring effective securities firm because only KSE member firms regulation and development of the financial services have direct access to the KSE market. sector, including capital markets. Even India, which The government provides incentives for advance is categorized as a developing country, has a policy technology FDI in the form of exemption/reduc- regime which supports private sector participation tion of national taxes, exemption/reduction of and competition in most of the supporting sectors, in IT Sector: Policies and Their Impact 63 Figure 19. Investment Climate Policy Highlights for Different Countries china india Malaysia Singapore Korea Simplified institutional Ministry of Informa- department of Infor- MdeC acts as a It regarded as a Focused initia- and implementation tion Industry as the mation technology one stop agency "Pioneer Status" tives like `Cyber framework policy making & for policy making for investors in industry. Korea 21 initia- administrative agen- & administering MSC. the 1st 5 year tive' & `It Korea cy, with supportive benefits Software develop- nCP formulated vision 2007' to role from provincial Central govern- ment a "Pioneer as early as 1980 develop a world governments ment schemes like Status" industry Ida formed in leader in ICt MoU between StPI for single 1999 government and window services Microsoft It considered essential services in many states Facilitating cross 100% FdI allowed 100% FdI in It & Matrade set up in 100% FdI in It & Ftas with USa, border trade and in It & BPo compa- BPo companies, 1993 under MItI BPo companies, Japan, India, investments nies, It Parks It Parks tax treaties with It Parks Korea, europe dtaas with around dtaas with devel- Japan, Korea, and others 65 countries oped and develop- germany, France, dtaas with ing countries UK, etc. more than 60 100% FdI in It & countries BPo companies, dtaa with over It Parks 60 countries enabling electronic Signature Formation of Cyber Communications Computer Misuse electronic e-Commerce law passed in appellate tribunal & Multimedia act, act and electronic Signature act 2005 digital certification digital Signature transaction act enacted in under It act, 2000 act and Computer enacted in 1998 1999, Protection Crimes act enacted of Information in late 90's Infrastructure act 2001. access to Venture recent interest from Presence of dedicated Venture Financial hub of Capital global VC funds established global Capital funds asia with global govt. backed government sup- VC funds like MSCVC and VC funds VC funds ported existing VC no tax on income tPMVF no tax on income tax concessions funds at provincial/ from a VC under- from divestment to VC funds It Park level taking of share by a VC fund enabling Competitive national telecom national telecom telecommunica- It839 strategy Infrastructure telecom market with Policy, 1999 Policy passed in tion market liberal- for overall devel- development dominance of state opened up telecom- 1994 ized in 2000 opment owned players munication market PPP for infrastructure PPP for infrastruc- Public private to private players development ture development partnership (PPP) for PPP for infrastructure physical infrastruc- development ture development addition to a well regulated and vibrant financial proper institutional mechanisms is integral to services sector. On the other hand, countries like effective implementation. Most of the countries China are yet to achieve the same level of maturity in have attempted to achieve this by constituting nodal their financial services sector and hence have to organizations within government for providing depend on government-sponsored venture capital "single window services." For example, most of the funds for supporting IT sector development. incentives offered to the IT Sector and IT Parks in Malaysia are administered through the Multimedia Efficient institutional and Development Corporation. In India, most of the implementation mechanisms are critical benefits and concessions are on offer through the While most countries have adopted regulations in Software Technology Parks of India, which has its line with established good practice, establishing the offices throughout the country. International Good Practice for Establishment of Sustainable IT Parks The developer of an IT Park requires various Encouraging private sector clearances for constructing buildings and related participation is critical facilities in the park. Such clearances include Almost all countries have adopted a variety of policy building plan sanctioning, fire services clearances, mechanisms for encouraging private sector invest- sewerage & drainage clearances, and environmental ment not only in the IT sector but in developing related clearances. A one-stop clearance agency helps "support" sectors such as financial services, telecom- the developer to get these IT Park related clearances munications, and physical infrastructure develop- faster, which helps them reduce time and thus ment. Other than a few niche areas like specific enables reduction in project cost. For example, in research & development initiatives where govern- Hyderabad, APIIC acts as the single point clearance ment organizations have played a direct role, the agency for building and related construction of government's role in most countries has been that of Hitec Park. Developers have significantly gained a facilitator. While in some countries, this represents from this arrangement. a conscious decision on the part of the government, in others it has also been driven to an extent by Intellectual property protection policies represent existing budgetary/fiscal constraints. another case in point. While most of the countries like China and India have amended their Copyright Many of the parks studied were developed through Acts in line with TRIPS and have also set up public-private partnership. Such policies have dedicated Copyright Tribunals for adjudication, benefited both the private sector as well as govern- litigants have the option of approaching the existing ment. For example, in case of Cyber Towers, judicial system as a final recourse. With the existing Hyderabad, government contributed by providing legal system in both these countries being considered land and the private player was responsible for relatively less efficient, value added intellectual developing the land and construction of the property related IT activities such as new technology building. Acquiring vast plots of continuous land development have taken a backseat compared to would have been very difficult and time consuming other countries like Singapore and Korea, which have for the private sector. With the government a faster process and a more streamlined judiciary. acquiring land through legislative means, the private sector developers ensured that the related facilities Focused policies for IT Park were constructed in a record time of 18 months. development are critical for "developing" ICT economies Flexible land-use policies providing Leveraging IT Parks for IT sector development the developers more choice becomes critical in economies like China and India, Flexible land use polices permits the developer to which lag behind developed countries in key ICT bundle IT office space construction with construc- indicators. With development of the IT sector being tion of other facilities such as shopping complex, closely linked with hotels, eateries, and housing complex. Such bundling "support" sectors like telecommunications, physical makes the project financially more attractive given infrastructure, it is easier to provide these support that the returns from the commercial/residential end services in geographically concentrated zones/areas. use are typically higher. For example, in CFZ, Consequently, many of these countries have adopted Malaysia 500 hectares of land has been zoned as policies for encouraging development of IT Parks. commercial use. In Hitec City, Hyderabad, 40% of An example of such a policy would the Information the net developable/usable area can be used for Technology Special Economic Zone (SEZ) policy in housing, club house, recreational center, shopping India, which offers a number of fiscal/other benefits center, a school and other support activities. to companies located in approved IT Parks. On the other hand, countries like Singapore, where the Linking incentives/subsidies with requisite support in terms of best in class telecom- identified strengths/core competencies munication and physical infrastructure is available throughout the country, have adopted policy regimes of domestic companies applicable to all companies in the IT sector, as In developing countries like India and Malaysia, most against companies located in a designated IT Park. IT and ITES companies are export oriented with the major markets being the U.S. and Europe. It may be IT Sector: Policies and Their Impact 65 observed that governments in these countries offer a flexible land use, encouraging private sector number of fiscal incentives on export income/profit. investments in these sectors for faster development, On the other hand in countries like Singapore where and motivating IT sector participation in capital the target market segment for most IT companies is markets. Thus, while India provides additional hi-technology, research intensive products, the flexibilities to IT & BPO companies for listing on subsidies and incentives offered by government premium stock exchanges in terms of a lower paid agencies are linked to R&D spending. Adopting the up share capital viz. a viz. companies in other fiscal policies to suit the strengths and markets of sectors, almost all the IT Parks covered in the indigenous companies is an effective policy measure study allow mixed land use with a specified to promote the domestic industry. proportion of the total land area earmarked for business end use, commercial end use and residen- Effective coordination with other tial purposes. It is essential for incorporating such ministries/departments flexibilities to existing policies or promulgating It is important to understand that the presence of new policies with these flexibilities to maximize good policies alone do not suffice, it is equally economic development. important that these policies get efficiently implemented. For proper implementation of Fostering efficient linkages with other policies it is important that there is effective co- economies is essential ordination between various government ministries, All successful countries are observed to have policy agencies and departments. Different countries have and regulatory regimes which encourage trade and taken different strategies in to enable such co- investment linkages with other economies. Such ordination. In developed countries like Singapore, linkages are usually facilitated through a variety of proper co-ordination between various departments policy instruments including liberal foreign direct and ministries administrating the subsidies & investment (FDI) guidelines, non-restrictive visa/ incentives has been ensured through efficient e- work permit procedures, unrestricted trade in goods Governance systems. In the developing countries and services, and double taxation avoidance like India and Malaysia, a dedicated government agreements. However, the level of maturity of the agency has been created to administer the subsidies individual policies vary from country to country, and incentives. For example, in Andhra Pradesh, with countries like Singapore adopting a relatively India incentives are administered through a high lower duty structure for imports across sectors, while level co-ordination committee called Consultative others like India offer a concessional duty structure Committee on IT Industry which includes for all capital goods imports specifically for the IT members from various government departments ( sector. Information Technology & Communication, Labor Department, Municipal Affairs Department, Land There are additional flexibilities for Department), utilities (electricity, water supply) policy formulation in a federal and industry associations (HYSEA, NASSCOM ). This committee is responsible for granting various structure of government In countries like China, India, and Korea which provincial/state subsidies, resolving implementation follow a federated structure with both Central issues and prescribing guidelines for industry (Federal) and State (Provincial/local) governments, growth. regional governments have attempted to differenti- ate themselves by providing additional benefits/ Having the right policy mix is essential concessions to IT/IT Park companies. For example, for maximizing spill over benefits in India, a number of state governments offer As has been established through the IT Park case additional flexibilities/benefits including subsidies studies, successful development of an IT Park on capital investments & interest payments and inevitably leads to significant spillover benefits in offering discounted land prices linked to employ- terms of other economic activities such as real ment generation. In Korea too, much of the estate development, vibrant retail, and hospitality policymaking has gradually shifted from the federal and financial services sectors. Many governments to the provincial governments. Such initiatives have have attempted to maximize these spillover benefits led to differential development of the IT sector in through a suit of policies including allowing International Good Practice for Establishment of Sustainable IT Parks different geographic regions within the same form the basis for formulation of specific policy country, with individual local governments attempt- initiatives. Given that implementation of the IT ing to differentiate themselves through additional strategy is crucial to the economic growth, specially benefits/concessions and investor friendly imple- for developing countries, some policy initiatives may mentation mechanisms. have short term implications like attracting IT players to the country while other policies have long For countries aspiring to offer offshore term implications like ensuring sustainability of the BPO services, formulation of a Data IT sector. Policies that can be implemented in the short term result in an immediate beneficial impact Protection Act is a necessity for the sector or "quick wins". The impact of policies In view of the recent breaches in security in various typically aimed at sustaining the sector are seen over BPO organizations, enactment of a data protection the long & medium term like for a non-English law has become a necessity. This has gained further speaking country to ensure English speaking IT importance with the data protection directive issued skilled manpower for the IT sector may take 5­10 by the EU (Directive/95/46/EC on the `protection years to be effective after implementing the policy of individuals with regard to the processing of initiatives through the school system. Quick wins, personal data and on the free movement of such although being far from comprehensive solutions in data'), which constitutes one of the biggest market themselves, act as building blocks to a sustainable IT for providing offshore BPO services. Based on this sector development. directive, UK has already enacted its `Data Protection Act'. The EU directive and enactment of Short-term policies Data Protection laws by member countries imply Some of the key priority short term policies are that only countries having data protection laws in highlighted below: line with the EU directives will be favored for off- shoring BPO services from EU member countries. Provide fiscal incentives to encourage Some countries that are trying to emerge as offshore BPO destinations have already formulated policies private sector participation Government needs to provide fiscal incentives in addressing this issue. For example, Department of order to encourage private sector participation in the Trade and Industry, Republic of Philippines has IT industry. These incentives could be in form of tax issued `Guidelines for the Protection of Personal exemptions, for example in India, IT and ITES Data in Information and Communications System companies are provided with 100% exemption on in the Private Sector'. The guidelines also provides profits from export of computer software till 2010. for an independent third party namely, Data They could also cover areas such as customs benefits, Protection Certifier, duly accredited by the govern- subsidies for employment generation, and equity ment, to certify the privacy program of a company support for start-ups. and thereafter to monitor and oversee its implemen- tation and enforcement. However, it is also critical that governments not just focus on providing such incentives to the IT companies, but also to `support' sectors like physical .8 Policy Prioritization infrastructure development like transportation, telecommunications, and real estate players. For example, the government of Singapore removed It is evident from the above that a number of policy restrictions on telecom licenses to introduce and interventions need to be undertaken by govern- encourage full competition in the telecom sector. ments to develop the country's IT sector. The Similarly, in India, the National Telecom Policy of government's role in facilitating the growth of the 1999 opened up the telecommunications sector to IT sector is primarily through developing holistic IT private players. As a result, a number of private strategies linked to the core competencies of the sector telecom operators started operations, resulting particular country such as innovation through in immediate improvement in the country's Research & Development activities and low cost communication infrastructure and customer service skilled manpower. The country's IT sector growth delivery on account of competition. strategy would require policy enablers which would IT Sector: Policies and Their Impact 67 Establish an effective implementation objectives of such body would be to maintain close interactions with the government in formulating the mechanism ­ Single window nodal national policy and specific action plans for agency development of the IT industry. The body's mandate Effective implementation of the incentive policies is may also include coordinating with foreign govern- one of the most important parameters that attracts ments and embassies to make the Visa and Work the private sector to invest. The establishment of Permit Rules more industry friendly; interacting proper institutional mechanisms are integral to with the Education Ministry, Universities on current effective implementation, with most governments industry's skill & future skill requirements for preferring setting up `single window/one-stop ensuring necessary changes in curriculum; and services'. Such nodal agency provide a one stop campaigning & generating awareness against servicing facility for developers of IT Parks as well as software piracy and copyright laws. the occupants/residents of such parks. An example of such single window/one-stop service nodal agency Such an organization also offers valuable services to in an IT Park is Multimedia Development its member organization in terms of encouraging Corporation in CFZ, Malaysia, which is the single them to improve quality of service, adopt modern point of contact for park occupants for obtaining technologies and provide innovative solutions requisite government approvals and facilitating through organizing regular interactions/IT sector business linkages with the government. seminars/meets. The existence of such an organiza- Create a coordinating committee which fosters tion also provides valuable linkages between linkages with various government ministries, entrepreneurs, investors, organizations and individu- departments, and agencies als desiring to connect with and mutually leverage It has been observed that developing/constructing an complementary skills, services, resources, contacts IT Park requires the involvement/clearances from and talents within the country. This also provides an various government ministries/departments/agencies. ideal forum for overseas and domestic companies to It would be beneficial if a coordinating body explore the vast potential available for Joint comprising members from various government Ventures, Strategic Alliances, Marketing Alliances, departments (Information Technology & Joint Product Development, etc. An example of Communication, Labor Department, Municipal such an Industry Body is NASSCOM in India. Box Affairs Department, Land Department) and utilities 6 provides a brief description of Nasscom. (electricity, water supply) be formed so that the process of approving an IT Park developers' plans, Design flexible land use policies for acquisition of land, issues relating to utilities & attracting private real estate players supporting infrastructure can be undertaken. Such an Flexible land use policies are required to attract empowered coordinating committee will ensure a fast private sector real estate players to invest in develop- track clearance and approval process. An example of ment of IT Parks, as such policies can ensure higher such a committee is the "Consultative Committee on returns on investments for the Park developer. Such IT Industry" in Andhra Pradesh which is empowered policies typically allow mixed land-use i.e. allow in areas such as granting various provincial/state residential and commercial land-use along with subsidies and resolving implementation issues. industrial land-use. Other means of providing incentives to developers include allowing a higher Promote/Facilitate creation of floor space ratio. The Floor Area Ratio (FAR) or Floor an industry body specifically for Space Index (FSI) is the ratio of the total floor area of buildings on a certain location to the size of the land promoting and developing of IT sector of that location. By allowing a greater FSI, govern- Steps should be undertaken by the government to ment enables the private investor to create more space facilitate/promote the creation of an Industry body which can be rented out/sold to occupants and thus for the IT sector, which could represent the indus- enables them to realize higher revenues. try's interests in issues like government procurement, information security, workforce development, long-term policies intellectual property protection and accounting, Besides the above-mentioned short term policies finance and taxation, and act as a bridge between that can be implemented on a priority basis to kick- industry and policy makers. One of the main start the IT sector development, governments would 8 International Good Practice for Establishment of Sustainable IT Parks also need to consider implementing policies having providing fiscal incentives are removed after a long term implications for ensuring sustainability of specified timeframe, the continued development of the IT sector. These include educational reforms to the sector can be ensured. Long-term policies should attract private sector in education; foster linkages be aligned to the core competencies of the country. with other markets like the capital market to attract For example, if a country's IT strategy is to focus on private funding, introducing Corporate Governance encouraging IT software development to leverage its norms so that even if some short term measures like low-cost educated manpower base, the government Box 6. National Association of Software and Service Companies (NASSCOM) naSSCoM is the chamber of commerce for the It software & services industry in India having over 1100 members, of which over 250 are global companies from the US, UK, eU, Japan, and China. naSSCoM was set up to facilitate business and trade in software and services and to encourage advancement of research in software technology. naSSCoM's vision is to establish India as the 21st century's software powerhouse and position the country as the global sourcing hub for software and services. naSSCoM is committed to work proactively to encourage its members to adopt world class manage- ment practices, build & uphold highest quality standards and become globally competitive. the primary objective of naSSCoM is to act as a catalyst for the growth of the software driven It industry in India. other goals include facilitation of trade and business in soft- ware and services, encouragement and advancement of research, propagation of education and employment, enabling the growth of the Indian economy through the development of the It sector and providing compelling business benefits to global economies leveraging global sourcing. nasscom is engaged in a number of activities for developing the It sector of India which includes: Fostering Partnership with the Government naSSCoM has representatives in various committees in the government of India, including the Ministry of Information technology, Ministry of Commerce, the Ministry of Finance, department of telecommunication, Ministry of Human resources development, Min- istry of labor, and the Ministry of external affairs. naSSCoM also acts as a consulting body for various state governments in India. naSSCoM has played a key role in enabling the government in India to develop industry friendly policies. naSSCoM has been a proponent of free trade, arguing for zero tariff protection, strong intellectual property and data protection laws, deregulation of the telecom market and the creation of software technology parks and private sector participation in the education system--measures which have already resulted in significant growth of the industry. naSSCoM has also been interacting with several foreign govern- ments to promote a win-win partnership through global sourcing to India. naSSCoM also plays a role in representing It Industry interests in issues relating to global alliances on software quality standards, immigration policies, Wto and free trade in services and next-generation good practice in global sourcing of services. Global Partnerships naSSCoM plays an active role in the international software community. naSSCoM is a member of the asian oceanian Comput- ing Industry organization (aSoCIo) comprising representatives from 20 countries encompassing over 10,000 companies of the region. naSSCoM is also a founder member of the World Information technology and Services alliances (WItSa). this forum comprises ICt associations from around 70 countries. Undertaking Research and Thought Leadership naSSCoM undertakes research on the ICt industry in India and the world in order to continuously educate its members on new business opportunities, business practices in global markets, potential threats to industry growth and attract additional investments in India. Encouraging improvement in Quality of Products and Services naSSCoM strongly believes in encouraging its members to provide global quality products and services. the association provides assistance to its members in achieving international quality certifications by organizing seminars and related programs on quality standards and disseminating relevant information. Intellectual Property Rights naSSCoM is an ardent supporter of strong intellectual property laws in India. In 1990, naSSCoM began an active public awareness campaign to educate users about the lawful use of software and launched the country's first anti-piracy hotline and India's first anti-piracy toll-free hotline. naSSCoM has also successfully facilitated enforcement laws against software piracy in India and helped introduce Cyber laws. naSSCoM continuously engages with the government of India for required changes in the IPr laws, keeping in line with WIPo and other International laws and treaties. naSSCoM also works closely with the Business Software alliance (BSa) to enforce copyright laws. naSSCoM provides its members with various forums for making business connections and sharing good practice, for example, IteS-BPo Forum, emerging Companies Forum, Product & Innovation Forum, Quality Forum, Security Forum, It Workforce develop- ment Program, It domestic Market Forum, naSSCoM engineering Services Forum. continue on next page IT Sector: Policies and Their Impact 69 Box 6. National Association of Software and Service Companies (NASSCOM) continued Within nasscom, there are specific groups or forums which deal with specific It industry segment or issues. Some of them include: BPO Forum: the naSSCoM's IteS-BPo Forum is focused on addressing the specific needs of the IteS- BPo industry and build the India brand in IteS-BPo. the IteS-BPo Forum has now been active for the past four years and conducts a series of activities at a national and regional level involving industry players, government and the academia. In its ongoing efforts to maintain the cutting edge advantage and facilitate the build up of skilled manpower, naSSCoM has instituted various initiatives like BPo certification Program, creation of national Skills registry for It Professionals database and conducting executive development programs. Emerging Companies Forum: emerging companies form a significant percentage of the Indian software and services industry and the forum aims to draw strategies to explore the huge growth opportunity that exists in this segment. the forum also serves as a platform for the emerging companies segment to share experiences, ally on critical projects and even focuses on partnerships to cater to customer demands. Engineering Services Forum: this forum was created in 2005 with the objective to help India-based engineering service providers optimally exploit the potential for engineering services offshoring/outsourcing (eSo) and help India achieve global dominance in this space. recently this forum has released a study titled nasscom- BaH study on the globalization of engineering services, first ever detailed assessment of the global engineering services market. Further, this forum is focusing on (i) Creating greater awareness about India's relatively lesser known strengths in the eSo domain, (ii) Strengthening links with the domestic manufacturing indus- try--which has strong linkages and spill-over effects on eSo, (iii) Working with the academia to enhance the talent pool for eSo and (iv) Working with the government to ensure a favorable business policy and regulatory environment. Providing a Forum for Innovation: the objective of this initiative is to promote the Innovative It ideas and identify innovative compa- nies in India. In the year 2004­05, naSSCoM ran a series of events across India, wherein Innovative companies made presenta- tions to an expert panel. the six finalists from these presentations were then invited to present at the naSSCoM 2005 event at Mumbai. during 2005­06, naSSCoM would continue with this initiative of identifying and showcasing innovative companies and also organize series of events and roundtable sessions on building innovation across the organization. IT Workforce Development Group: the Workforce development initiative was created to catalyze It industry interface with the academia to ensure availability of globally employable quality It professionals. the group is responsible for arranging a number of industry-academia workshops and seminars to discuss the current issues and design probable solutions. Product Forum: the naSSCoM Product Forum aims to provide relevant industry information, exchange of ideas and identify issues related to marketing, branding, investments for products developed in India including. the forum also addresses issues relating to IP (Intellectual Property) creation and protection. the objectives of this forum are (i) Improve the base quality of software products built by Indian ISVs (ii) Improve credibility for "Made in India" software in local and global markets by establishing enterprise credibility with a certification program and aid in building a robust local software ecosystem (iii) establish comfort for CIos on local ISV solu- tions as they may suspect the quality of products from unknown vendors and hence prefer expensive global brands and (iv) Increase domestic demand for ISV solutions by establishing credibility with a third party industry certification. Quality Forum: naSSCoM has recently launched this forum to discuss and promote various issues related to Quality. the key objective of the forum is to provide India with next generation leadership in the Quality space. Trusted Sourcing: naSSCoM actively promotes India as a trusted Sourcing destination and has been playing a proactive role in ensuring that the Indian Information Security environment benchmarks with the best across the globe. through a 4 e initiative: en- gagement, education, enactment and enforcement, the naSSCoM Security Forum aims to create an enabling environment in the country for information security and compliance. naSSCoM has also formed a national advisory Board on Information Security & Compliance. the main functions of the board include laying down security standards which include identification of amendments, liaising with the Ministry of It to obtain buy-in from government, perform security audits & certification for members and run aware- ness programs with respect to security issues. Domestic Market Forum: the domestic Market Forum is being set up to further build the domestic market. the Indian user industries are outsourcing parts or entire It infrastructure to specialized vendors. recognizing the growing importance of the domestic market and the increased specialization which is the requirement of the user organizations, naSSCoM is forming the domestic Market Forum which will serve as the platform or a link of the non It sector with the It industry. Source: as discussed with Col. S.V. ramachandran, regional director nasscom & nasscom annual reports would need to improve the legal system to protect relating to intellectual property, and the implemen- and promote proprietary knowledge as this is often a tation of such laws would be critical to gaining company's main business asset. As such, laws investor confidence. 0 International Good Practice for Establishment of Sustainable IT Parks Chapter 5 Country Case Studies .1 Country Case Study: CAGR of 22% during this period (Source: The Ho Chi Minh Computer Association). Vietnam 5.1.2 IT Sector: Growth, Composition 5.1.1 IT Sector: Contribution to GDP The Vietnamese economy is estimated to have and Trends grown at an average rate of around 7% from 1997 Compared to other countries in the region, Vietnam to 2004, with the growth rate increasing to 8% in has been a late starter in developing its IT sector. 2005. In 2005 the GDP was USD$52 billion Though the Vietnamese government introduced its (Source: World Bank). first IT related policy in 1993, the focus on develop- ing the sector as a significant contributor to its Vietnam still remains an agricultural based economic development was made in 2000 when the economy with the sector accounting for 21% of its Prime Minister approved the resolution on "estab- GDP and employing around 57% of its working lishment and development of the Software Industry population. Manufacturing and the services sector in the period 2000­2005". Prior to 2000, the sector accounted for 41% and 38% of the country's GDP was largely dominated by IT hardware assembly respectively. operations. The IT sector contributed USD$1.4 billion, or During 2005, the revenues from the IT sector around 3% of GDP (please refer Figure 20 below). crossed the USD$1 billion mark and represented a While the share of IT in Vietnam's GDP is signifi- growth of around 50% over the previous year. cantly lower than countries like China and India However the hardware sector continued to dominate where the IT sector contributes around 4%­5% of this sector contributing 82% of total IT revenues. GDP, the Vietnamese IT sector has shown significant (please refer Figure 21 below for details). Key growth during the period from 2002 to 2005, with a constituents of the sector include: Software sector comprising software develop- ment and services with revenues of USD$250 million in 2005. Of this, USD $70 million (28% of software sector revenue) was contrib- Figure 20. IT Sector Share of GDP uted by exports. Japan and the U.S. accounted for the major share of software exports mainly comprising software development. 60 100% 90% The software/IT enabled service sector has been 50 80% recording a 40% year on year growth (please 70% 40 60% refer Figure 21 below) 30 50% Over 80% of Vietnam's revenues from the IT 40% hardware sector was contributed by exports by 20 30% 20% two foreign invested companies, namely, Fujitsu 10 3% Computer Products of Vietnam Inc. which 2% 2% 10% 0 0% manufactures and exports printed circuit boards 2003 2004 2005 to its affiliates in the Asian Pacific region (2005 GDP IT Sector share of GDP exports: USD$ 515 million) and Canon Source : The World Bank; The Ho Chi Minh Computer Association Vietnam Co. Ltd. manufacturing bubble jet Country Case Studies 71 Figure 21. Vietnam IT Sector Figure 22. Top 5 Vietnamese IT Composition Companies (2005) company revenue, 2005 (mn) 1.5 FPt ­ Corporation for 323.77 1.2 1.15 Fnancing and Promoting CAGR 22% technology 0.9 VdC ­ Vietnam 31.20 0.76 datacommunication Company 0.7 Samsung Vina electronics 30.21 0.6 0.55 Company IdC group ­ Ha noi Informatics 24.71 0.3 development Co ltd 0.085 0.12 0.25 0.17 CMS ­ Computer Manufacturing 13.42 0 and Service Co ltd 2002 2003 2004 2005 Hardware Software/services Source: Vietnam ICt directory 2006: HCM Computer association Source : Statistical Yearbook of Vietnam, 2005, The Ho Chi Minh Computer Association Hanoi having development centers at Hanoi, HCMC and Danang. printers with bulk of its printers exported to Europe and USA (2005 exports: US $450 5.1.3 Government Initiatives for million). (Source: Vietnam ICT Outlook 2006: Development of the IT Sector HCM Computer Association) The government of Vietnam has been consistently The software sector is dominated by small and supporting the development and growth of the IT medium sized companies set up by local sector through policy interventions. The Master plan investors and overseas Vietnamese. None of the for IT use and development in Vietnam by 2005 was well known global software players have a one such policy prepared by the Ministry of Science development center in Vietnam as of date. & Technology (MoST) and approved by the Prime FPT is the leading domestic IT enterprise Minister in 2002. The master plan had envisaged having both hardware as well as software achieving the following milestones by 2005. operations. It is the leading producer of personal computers in Vietnam (2005 sales: USD$14.6 Developing internet and introducing modern mn). However, bulk of its revenues are from telecommunication networks to ensure at least trading in hardware and mobile phones. During 5% of total population had access to internet by 2005 its software operations contributed 2005. USD$23.86 mn with software exports being 50,000 IT experts to be trained of which 25,000 USD$13.2 mn (Source: HCM Computer people should be professional programmers with Association). A list of the top 5 IT companies in foreign language skills. Vietnam have been presented in Figure 22 alongside. The enterprises in the IT sector are primarily located Box 7. IT Hardware Sector in and around the main cities of Vietnam, namely, Investments in Vietnam Hanoi in the north and Ho Chi Minh City (HCMC) in the south. The major IT hardware units Fujitsu's facility was set up at an investment of around USd$200 million in 1995. are located in Industrial Parks with Fujitsu having its facilities in the Dong Nai Province, Canon in Hanoi Canon Vietnam's printer facility was set up with an investment of and Intel's proposed unit coming up in an High around USd$25 million in 2001. this facility is being expanded at an investment of around USd$100 million. Technology Park outside HCMC. Most of the software enterprises are located in HCMC or Hanoi. Intel has recently announced plans to set up a semiconductor assembly unit with an investment of USd$300 million. Domestic software major FPT is headquartered in 2 International Good Practice for Establishment of Sustainable IT Parks Revenues of USD$500 million from software As part of the government's initiatives to develop industry with 40% comprising export revenues. the IT sector in the country, an E-Governance initiative called "Project 112" was undertaken in As of date, though the country had not been able to 2001 with a budget of around USD$100 million. achieve most of the above targets, it has made The project involved computerizing and standard- significant progress in working towards achieving the izing state administrative management across milestones. Currently, around 25,000 IT profession- provinces and cities through use of common als are estimated to be working in software firms and databases and software. It was envisaged that on software industry revenues amounting to around successful completion of this initiative, state USD$250 million in 2005. The Ministry of Posts administration and public services functions will be and Telematics (MPT) of Vietnam is responsible for simplified with faster service delivery. However, due the development of the IT sector in the country with to change management issues, the system was not MoST being responsible for development of IT accepted by most public servants. The government, Parks in the country. Based on the outcomes till with support from the World Bank, is once again 2005, MPT has already prepared the master plan for reviving this project with pilot projects being the period 2006­2010 which is awaiting the Prime implemented in Ha Noi, HCMC and Danang. Minister's approval. The focus of the 2006­2010 Given that local IT enterprises did not have master plan is on IT enabled services like business adequate experience to undertake large scale process outsourcing and software services. projects, the contracts were given to global IT players. However, local IT enterprises were encour- Vietnam's key ICT indicators as on 2004 are aged to partner with the global firms for implemen- comparable with countries like China, India, tation. (as per discussions with Mr. Tran Thanh Malaysia (please refer Figure 23 below for details). Son, The World Bank) Figure 23. Key ICT Indicators for Vietnam parameters indonesia Malaysia china india philippines thailand Vietnam Singapore Social indicators total Population (millions) 218 25 1296 1080 83 62 82 4 Urban Population (%of total 47 64 40 29 62 32 26 100 population) ict Sector indicators Access: telephone lines (per 1000) 46 176 241 43 41 106 70 430 Internet users (per 1000) 52 392 73 23 58 112 65 559 Personal computers (per 1000) 19 170 40 11 29 74 11 565 Mobile Subscriber (per 1000) 141 573 258 48 387 420 53 891 Population covered by mobile 85 96 73 41 80 92 93.8 100 telephony (%) Quality: Broadband subscribers 0.3 10 16.5 0.6 0.3 0.2 0.6 118.2 (per 1000) International Internet Bandwidth 18 127 57 4 12 48 27 5699 (bits/person) Affordability: Price basket for fixed line 6.2 8.7 3.6 3.2 12.2 8.3 4.3 6.7 (US$/month) Price basket for mobile 4.6 5.6 3.7 3.2 4.0 6.8 6.9 5.7 (US$/month) Price basket for internet 22.3 8.4 10.1 8.7 17.1 7.0 19.9 11 (US$/month) ICt expenditure (% of gdP) 3.0 6.9 5.3 3.7 5.9 3.5 -- 10.4 Source: World Bank, UndP, ItU and others. Country Case Studies 73 To overcome the infrastructure related constraints the first IT Park in Vietnam and is located in the across the country, the government has actively heart of the business district of the city. adopted a strategy of setting up IT Clusters/Parks offering requisite infrastructural facilities and Applying the CLIP framework to SSP, we observe: linkages for attracting investments in this sector. As per the Ministry of Posts and Telematics, govern- Capital: SSP was developed by the Saigon ment of Vietnam, there are currently 10 IT Parks in Electronic Information Company (SEIC), an enter- Vietnam, 4 of which are located near HCMC, 2 prise owned by the HCMC local government. The near Hanoi with the remaining 4 located in and local government awarded the SSP project to SEIC around the cities of Haiphong, Danang, Cantho and in 1997, when SEIC's original business of con- Hue respectively. sumer electronics failed. While the land was provided to SEIC by the government, SEIC Almost all the existing IT Parks in Vietnam have developed the 2500 square meter facility at a cost been established and funded by the city/provincial of approximately USD$1 million primarily governments. The government's role has been that of comprising cost of construction, communication a facilitator with its involvement limited to acquir- networking, and power back up facilities. This ing and developing the land and setting up the investment was funded through loans from state common infrastructure for the IT clusters including owned banks which were guaranteed by the internal roadways, internal communication net- HCMC government. works, power lines, water supply lines, and back-up power facilities. The management of these IT Since its inauguration in 2000, SSP has been clusters are generally with State-owned enterprises enjoying near 100% occupancy primarily on with these enterprises charging maintenance fees account of its attractive location with all its tenants from the occupants. The developed plots are given being in the software development/IT training on lease to IT companies/Real Estate developers for business. Other than SEIC's own software opera- constructing office space for IT companies with tions (a recent diversification) occupying 400 square most of the lessees being from the private sector. meters, all other occupants are from the private sector comprising a mix of local private companies The only IT Park developed in the private sector is and enterprises set up by overseas Vietnamese. E-Town located in HCMC which has been set up Currently there are 14 tenants having rental and is operated by Refrigeration Electrical agreements ranging from 1 year to 5 years. Most of Engineering Company (a public listed company the tenants renew their rental agreements every year. with 90% shares held by public and balance 10% by The largest tenant occupying 1000 sq meter space is government of Vietnam). Global Cyber Soft owned by an American of Vietnamese origin. The first IT Park in Vietnam, the Saigon Software Park in HCMC, was established in 2000. Quang During the first 2 years, in order to attract local Trung Software Park located around 15 Km from software companies, SEIC offered space at a HCMC is one of the largest IT Parks and is subsidized monthly rate of USD$10 per square feet considered to be one of the most successful IT Parks which included the cost of maintenance, electricity in the country. Saigon Hi Tech Park, which is about and internet services. Currently, rents are charged at 15 Km from HCMC, is under development. An market rates (USD$22 per square feet per month assessment of these IT Parks based on our visits have for ground floor occupants and USD$18.50 per been presented in the following segment. square feet per month for upper floor occupants) with use of electricity and internet services being 5.1.3.1 Saigon Software park billed separately. Some of the original tenants have Saigon Software Park (SSP) was established by the since vacated the park on account of high rentals. HCMC People's Committee (local government) Saigon CTT, an occupant, had indicated during our with the objective of developing the software interactions that the monthly rent charged at around industry in Vietnam. HCMC is the largest city in USD$18.50 per square meter is substantially higher Vietnam and is considered as the commercial capital than commercial office space available in the locality of the country. Inaugurated in the year 2000, SSP is at USD$15 per square meter. International Good Practice for Establishment of Sustainable IT Parks Given SSP's location in the center of HCMC city, Box 8. the employees of the tenants live in HCMC and have access to all facilities available in the city. Saigon Ctt offers courses on networking and telecommunica- tion software along with Java programming. It has been a tenant Given the space constraint in SSP some of the of SSP since the It Park opened in 2000. though it has trained original tenants have relocated to larger premises in around 3000 students till date, none of the other tenants have any placement arrangements with Saigon Ctt. other than its center in HCMC when their businesses expanded, requiring SSP, the company has another center in HCMC and one in Hanoi. more office space. Occupants like Saigon CTT indicated during our discussions that they too may (Based on discussions with Mr. nguyen thanh Huyen, deputy Head of S&M department, SaigonCtt) relocate from SSP in the near future when they require more space for their training center as they expand and introduce new courses. Other than office space and related IT infrastructural People: HCMC being the largest center for facilities, SSP does not have any provisions for development of IT sector in Vietnam, there is offering any incubation facilities or arranging funds adequate supply of trained manpower for the for its tenants through linkages with Venture Capital tenants of SSP. There are 33 universities/colleges in funds/financial institutions or other financial sources. and around HCMC for providing trained man- power for the sector. In addition, there are numer- Linkages: Most of the tenants in SSP are engaged in ous software training institutes in the city which providing software services including software trains graduates in becoming software professionals. developing, media contents, and network solutions & system integration. Besides SEIC's own IT In conclusion, SSP essentially offers office space to training center (a franchise of NIIT of India), software firms along with internet and communica- another tenant, Saigon CTT occupying 200 square tion facilities. Strictly speaking, it cannot be called meters of space offers IT training courses. There is an IT Park as it does not provide any linkages among currently no forward or backward linkages amongst its occupants or any special facilities, such as one the tenants in terms of using each other services. stop service, incubation facilities for encouraging start up companies, or marketing/financing support. infrastructure: SSP comprises a 5 story building SEIC's role in SSP is essentially that of a landlord. situated in the heart of the business district of HCMC offering 2500 square meter of office space. 5.1.3.2 Quang trung Software city (QtSc) QTSC was conceptualized by members of HCMC Facilities provided by SEIC to tenants of SSP include: Computer Association for providing adequate facilities for the development of the software Internet connection from the gateway provided industry in HCMC. The plan for QTSC was by Vietnam Data Communication. While this developed following a study by members of the service was considered to be very fast in 2000, Association which included visits to IT Parks in currently there are a number of service providers Bangalore (India) and Malaysia. The study was offering similar/better connectivity through funded by US Trade Development Agency. In the broadband at competitive rates. Occupants like year 2000 through a decision of the People's Saigon CTT have opted for internet connectiv- Committee of HCMC, QTSC was established on a ity from external service providers. 43 hectare plot (earlier used as a military base) VSAT connectivity is provided to some tenants located 15 Km away from HCMC. from LORAL Skynet, a US based service provider. In March 2001, QTSC was opened with 7 existing While power is supplied by the state owned renovated buildings aggregating 12,000 square feet electricity company, SEIC provides generators of office space. A unique advantage offered by QTSC for back up power in event of an outage. was high-speed internet connectivity which was not available anywhere else in Vietnam. This prompted Water supply and telecommunication services are many local software enterprises including FPT, one provided by the State controlled service providers in of the largest domestic IT enterprises in Vietnam to HCMC. take up space in QTSC. 4 new buildings were Country Case Studies 75 subsequently constructed increasing the total area Most of the plots have been allotted based on available for rent to 20,000 square feet. Currently 70 applications and conformity to the master plan on a enterprises are occupying space in QTSC. In 2003, first-come first-serve basis. Given that QTSC the master plan for development of QTSC was follows a one price lease policy, no bidding process approved by the HCMC People's Committee. was involved. Plots have been allotted to IT As per the master plan, the 43-hectare plot of land companies, real estate/commercial property has been divided into 47 plots to be leased to private developers (local private sector players as well as sector developers/software enterprises. As per the foreign enterprises), IT Training institutes/universi- master plan, 50% of the plots have been earmarked ties. Till date, lease agreements have been concluded for software activities with other plots identified for with over 30 investors for developing 186,000 the following activities: square meters of land at an aggregate investment of around USD$70 million. The lessees have been 6 plots for constructing residential apartments given the right of pledging the land use right and and villas. assets related to land as collateral to financial 4 plots for establishing IT training facilities institutions operating in Vietnam for obtaining including a university to be set up within the bank loans for their projects. Park. 1 plot for a commerce and exhibition center. Currently, there are 70 tenants in the park compris- 1 plot for constructing a Health care center. ing 36 domestic enterprises and 34 foreign-owned 3 plots are to be used as a car parking area enterprises. It should be noted that most of the including a bus station. foreign enterprises have been set up by overseas 1 plot for entertainment and recreational Vietnamese. None of the tenants can be categorized facilities. as an anchor tenant and none of the well known global software players have come to QTSC till date. Almost all the plots have already been leased out and Initially, when it opened, QTSC attracted software construction activities have already started on most enterprises due to internet facilities offered which was plots. Once the development of office space for not available anywhere else in the country. However, software activities are completed in some of the plots following the availability of broadband based internet by 2007, the 7 old buildings will be demolished and services in cities like HCMC since 2003, many of the the existing tenants will be offered space in the original tenants have relocated to HCMC. newly developed facilities. QTSC is maintained by Quang Trung Software City In 2005, QTSC started offering incubation facilities Development Company (QTSCDC), an enterprise for start up enterprises through Quang Trung under the administrative control of the HCMC Software Business Incubation Company Limited People's Committee. QTSCDC has the mandate of (SBI). Details of the incubation center have been implementing the master plan including managing presented in Box 9. Given the current scale of the application process, allotment of plots, monitor- operations, QTSC has not yet tied up with any ing construction activities of lessees, construction of financial institutions/venture capital funds for inside roads and other infrastructural facilities arranging financing for the occupants/incubatees. besides providing maintenance services to the There is currently one venture capital fund dedicated occupants of the Park. to the IT sector in Vietnam, namely, IDG Venture Capital fund (corpus USD$100 million). Applying the CLIP framework to QTSC, we VinaCapital is in the process of launching another observe: IT sector dedicated fund with a corpus of USD$50 million. QTSC is currently in talks with both Capital: The development cost of QTSC, estimated entities for a possible tie-up. at USD$16.25 million was largely funded by HCMC People's Committee with government of Vietnam Official monthly rental rates in QTSC is USD$5.5 contributing a marginal amount. The IT Park is per square meter. The rental agreements with the owned by the local government with the maintenance respective tenants are renewed every year with the old and development activities being handled by a tenants negotiating a lower monthly rate of around government owned enterprise, QTSCDC. USD$3.50 including maintenance charges with International Good Practice for Establishment of Sustainable IT Parks QTSCDC (based on interactions with Pyramid Software Development). For plots on lease, an annual Box 9. Incubation Center at QTSC lease rental of USD$0.76 per square meter is charged SBI is structured as a non profit organization with QtSC devel- by QTSCDC with USD$0.40 per square meter opment Company holding 85% shares and HCMC Computer being paid to the local government on account of association holding the balance shares. land lease rental. QTSCDC retains USD$0.36 per For the first 3 years this project will be supported by eU's private square meter of land as maintenance fees. sector development program which besides a financial assis- tance of euro 2 million is also providing management expertise and know how for running the incubation program. eU's panel Linkages: As per QTSC's charter, occupants in of experts will also help incubatees with commercialization and QTSC are expected to offer the following products/ marketing of ideas/products/services. services: eU will assist SBI till 2008, by which time its operations are expected to be sustainable. SBI is in the process of building a 2000 square meter incubation Software products/customized software center having a capacity for accommodating 25 enterprises on Software outsourcing, offshore development a plot allotted to it by QtSC. the facility expected to cost $1 mil- IT services including data processing, call centers lion will be completed by 2007. this investment is being funded by the company's own resources. Facilities to be provided to Software consultancy, including E-business, ERP incubatees include solutions, etc. (i) office Space, (ii) office equipment including computers, (iii) Development of scientific research and human Consultancy on business development and business planning. resource training institutions relating to IT Currently there are 3 projects are being evaluated for incubation, 2 being projects of students of state universities with the other The existing tenants in the park are primarily one belonging to students of a local polytechnic institute. all the involved in software development, data processing projects are in the area of software for internet/web develop- ment. the projects had been selected based on (i) personnel and IT training. structure/team and (ii) evaluation of business plan. Post evalua- tion 2 selected projects will be supported for a maximum period of 3 years after which if successful, these enterprises will be For ensuring linkages and business relationship expected to move in as tenants of QtSC. amongst the occupants, QTSC has put in place a SBI expects to use its relationships with banks and venture capital strategy for attracting foreign software enterprises into funds like Idg Venture Capital to arrange funding for the incuba- the Park. QTSC through the government has tion enterprises. additionally, eU funds may be given as loans. approached development agencies including US SBI has proposed the following model for recovering rent for the Trade Development Agency, VNCI (US), JETRO incubation period from the incubatees: (Japan), EU, and USAID to help market QTSC as an Year 1 ­ no rent attractive IT destination in their respective countries. Year 2 ­ 20% rent Year 3 ­ 80% rent In addition, efforts are being made to involve rent expected to be charged will be USd$5.5 per sq mtr/month Microsoft, IBM, CISCO for partnering with the IT in line with that charged from other tenants of the park. Besides training institutes in QTSC to offer courses that will rentals, SBI also expects to generate revenues through offering training programs. be beneficial for building the requisite skill base required for the occupants of the park. (Based on discussions with Mr. Wolf rienow, eU Senior advisor, SBI and Mr. lai tan Binh, Business development Manager, SBI) infrastructure: QTSC is located 15 Km from HCMC and is 15 minutes away from the interna- tional airport. QTSC offers the following facilities to occupants: network. In addition, each building has a diesel generator for providing back up power. Internet connectivity through 3 gateways, 2 with One stop service for assisting tenants with a speed of 34 Mbps and 1 with 100 Mbps. The licensing and administrative formalities, 3 lines work alternately to ensure uninterrupted conducting customs procures, assistance with connectivity. visa processing for expatriate employees. Telecommunication services is provided through Transport service connecting HCMC. a network of optical fibre cables. 24*7 maintenance service and security services. Continuous power supply is ensured through 5 Restaurant and canteen facilities. alternate lines from the national electricity Post office & ATM. Country Case Studies 77 Water is supplied by HCMC. QTSCDC primarily in Europe and America. The industry has operates a sewerage treatment plant. to spend a lot of time on training graduates before they can be placed on jobs. However compared to All the occupants we had interacted with were other countries in the region, the rates for manpower largely satisfied with the services provided by in Vietnam is quite low ranging between USD$500­ QTSCDC. Most of the occupants found the one 1000 per month depending on experience and skill. stop service to be very useful. While the quality of internet service provided in the park was appreciated The local government is trying to augment the skill by all, everyone felt that the services were expensive base for the IT sector through encouraging IT when compared to that in HCMC where the local Training organizations to invest in QTSC and government subsidizes internet services. Interactions arranging partnerships for them with global IT with foreign invested occupants also indicated that majors like Microsoft, CISCO, Sun Microsystems, telecommunication costs were much higher and IBM. compared to other countries in the region. While the distance of QTSC is only 15 Km from 5.1.3.3 Saigon Hi-tech park (SHtp) HCMC, it takes 45 minutes traveling time from SHTP was established in 2002 based on a decision HCMC during morning/evening rush hour on approved by the Prime Minister of Vietnam. account of traffic load and condition of the road Currently the park is under construction with the linking the city. One of the main reasons cited by first phase expected to be ready by 2007. SHTP is FPT, Vietnam's largest IT company, for shifting back situated 15 km from HCMC on the highway to HCMC was that its employees found the connecting HCMC with Hanoi. SHTP is strategi- traveling time to and from QTSC to be too long. It cally located in the largest focal economic region of is understood that most of the initial tenants moved the south of Vietnam covering 55 industrial zones/ back to HCMC for similar reasons once internet export processing zones in HCMC and provinces of services were available in HCMC. Dong Nai, Binh Duong, binh Phuoc, Tay Ninh, Long An and Ba Ria ­ Vung Tau. This region QTSC has residential units, some of which are ready contributes nearly 30% of the country's GDP and for occupation. However, given that there are no has been growing at a rate double the national social or recreational facilities inside QTSC, average. The objective of the government in setting employees of almost all tenants prefer to live in up SHTP is to position the park as a technopolis HCMC. Based on our interactions with select serving the above referred economic region. SHTP occupants, expatriate employees are comfortable is expected to focus on the following areas: living in HCMC which has all the infrastructure and facilities comparable with any metropolitan city Micro electronics, information technology and in the world including good healthcare facilities and telecommunication. international schools. Precision mechanics and automation. Biotechnology. People: Currently over 5000 people are working/ New/advanced materials, nanotechnology. training in QTSC. There are 6 IT institutes in the park with 600 students completing their IT courses Applying the CLIP framework to SHTP we observe: each year. There are around 33 universities and colleges in and around HCMC which provides Capital: SHTP is a project of the Ho Chi Minh City skilled manpower required for the IT sector. Being People's Committee and is being funded by the local close to HCMC, there is easy accessibility to skilled government. The park is being developed on 913 manpower for the occupants. Based on our interac- hectares of land with 300 hectares being developed tions, most of the occupants felt that the curriculum in phase 1 and the remaining land will be developed followed by the local universities and colleges were in phase 2. While phase 1 is expected to be com- not adequate to meet industry requirements. pleted by 2007, phase 2 will be completed by 2010. Knowledge of English language was identified as another barrier to providing IT enabled services like Two state-owned agencies have been set up for call center and outsourcing services involving developing and managing the park, namely, SHTP interactions as the markets for these services are Project Management Company for developing the 8 International Good Practice for Establishment of Sustainable IT Parks Figure 24. SHTP Master Plan Total Area : 913 hectares to be developed in 2 phases with phase 1 comprising 300 hectares. Phase 1 to be completed by 2007 Phase 2 to be completed by 2010 Hi Tech manufacturing area Research & training area Trade & supporting services Residential area Source : Saigon Hi-Tech Master Plan ­ http://www.shtp.hochiminhcity.gov.vn/ infrastructure for the park and SHTP Development meter for a 50 year lease (annual payment option Company for providing maintenance services to the also available at USD$5­9 per square meter). occupants of the park. Though phase 1 is yet to be completed, 19 plots SHTP Project Management Company is primarily measuring around 270 hectares have already been involved in land development and constructing the leased to a mix of enterprises comprising global hi infrastructure in the park including internal tech majors like Intel, Nidec of Japan, HP; local IT roadways, power/telecommunications network, and majors like FPT (for building a software develop- water & sewerage. ment center); State owned enterprises like Saigon PostTel (telecom operator). Total investments The plots developed are being leased to various expected to be made by the tenants is around entities selected by the SHTP Management Board USD$840 million. in accordance with the specific zones identified in the master plan. Like QTSC, SHTP follows a one Although there is no anchor tenant, Intel's decision price formula with plots being provided for Hi Tech to operate out SHTP has had a positive effect with manufacturing, including software development on the global majors like Microsoft and Motorola a 50 year lease at USD$50 per square meter under being approached by SHTP for investments in the upfront payment option and USD$1.5 to $2.5 park. under the annual payment option. Maintenance fees are charged separately at USD$0.48 per square Once the park is operational, SHTP plans to meter per year. Plots earmarked for commercial use introduce incubation facilities and enter arrange- including residential & hotel end use have an ments with banks/financial institutions/venture upfront lease payment of USD$220 per square capital funds for funding start up enterprises. Country Case Studies 79 Linkages: As discussed earlier, the government had planned SHTP for providing linkages in terms of Box 10. Intel Investment in SHTP IT/Hi Technology products/Research & In February 2006, Intel announced that it would set up a as- Development support to businesses located in the sembly and testing unit for semi conductor products in Vietnam. 55 industrial/export processing zones located in this USd$300 million facility will be one of the largest foreign close proximity to SHTP. To ensure steady supply of direct investments in Vietnam. Intel has decided to set up the facility in the Saigon Hi-tech Park near HCMC. the facility is skilled manpower, SHTP has been located adjacent expected to be commissioned by early 2009 and will employ to the National University campus, which has over around 1200 workers. 15,000 students pursuing courses in science and While Intel did not disclose the names of the countries that technology. were considered for this investment, it currently operates similar facilities in China, Malaysia, Philippines and Costa rica. the possibility of expansion of these facilities vis-à- vis a green field infrastructure: SHTP will be providing the project had been considered before arriving at the decision to following facilities to its occupants: invest in Vietnam. Intel's decision to invest in Vietnam was guided by the following factors: Telecommunications to include broadband total cost of operations, which included cost of constructing the facilities, cost of operations and labor. packet switching network, wired & wireless data availability of skilled human resources. transmission, high speed internet access. Physical infrastructure like availability of quality power, road network, water and airport. Power through a medium voltage network Incentives offered by the government. connected to 2 different national sub stations, Market access. Political stability and economic growth. 24/7 back up with its own gas turbine power plant. Vietnam ranked high in low cost of labor, physical infrastruc- Water will be sourced from Binh An water plant ture at SHtP and particularly political stability. Intel was also impressed with the attitude of the government and the efforts it is with SHTP operating its own 9500 cubic meter making in developing the It sector. per day (scalable to 24300 cubic meter per day) Intel generally opts to locate its facilities in government owned high pressure pump station. Hi-tech parks. Its facilities in China and Malaysia are located in 2 wastewater treatment plants. government owned Hi-tech Parks. Intel will use its own funds for setting up its Vietnamese facility. Besides this, SHTP has earmarked zones for a hotel, residential areas, commercial areas. Intel has already identified engineering colleges and technology universities from where it will recruit engineers. SHTP is located on the Trans Asia Highway (Based on discussions with Mr. than trong Phuc, Country Man- ager, Vietnam & Indochina, Intel Semiconductor ltd.) connecting HCMC with Hanoi. It is 15 Km from HCMC, 18 Km from the international airport at HCMC and 12 Km from the Saigon harbor. Given SHTP's close proximity to HCMC, it is expected that people working in SHTP will live in respective campuses. Like the occupants of QTSC, HCMC and make use of the social infrastructure the outdated curriculum followed in most colleges/ and recreational facilities of the city. universities is an area of concern. Intel intends to recruit engineers and train them for a year in its other During our interactions with Nidec and Intel, both facilities in China, Malaysia, and Philippines before foreign enterprises expressed satisfaction with the they are deployed at the Vietnam facility. Compared infrastructural facilities to be provided in SHTP. to other countries in the region, the cost of skilled labor is lower in Vietnam. People: There are 30 universities and 27 vocational schools including IT training centers in the proximity 5.1.4 Assessment of Critical Business of SHTP that should be able to supply skilled and Policy Enablers manpower for the occupants of the park. Occupants It has been observed that most of the countries that like Intel has already identified engineering colleges have emerged as global leaders in the IT sector have from where it will recruit and has initiated communi- been able to leverage some key business enablers, cation programs with students through participating allowing their IT companies to thrive in the global in Hi Tech fairs and sponsoring seminars held at the marketplace. Additionally, the governments of many 80 International Good Practice for Establishment of Sustainable IT Parks of these countries have consistently supported the commenced operations in the country thereby development of the sector through a set of fiscal, increasing the level of competition. However, local innovation, people, and investment climate policies. IT software enterprises not having asset intensive The current section details our assessment of some operations generally cannot borrow from banks as of the critical business and policy enablers that are they cannot provide adequate security cover. impacting/are likely to impact the development of the IT sector in Vietnam. Incubation facilities are provided for IT start-up entities by select organizations in both the public as 4.1.4.1 Sources of capital well as the private sector. Public sector initiatives The IT sector in the country comprises primarily of include incubation centers operated by Universities foreign invested companies and domestic compa- like Hanoi University of Technology through its nies. While most foreign owned enterprises have Centre for Research and Consulting on been funded through foreign direct investments Management (CRCM) ( Please refer Box 13) and from their respective parent organizations, the the Quang Trung Software Business Incubator domestic enterprises mainly comprising small and Company Ltd situated inside the Quang Trung medium sized enterprises have been funded Software City (please refer Box 8). In the private primarily through promoters' capital. sector, FPT through one of its subsidiaries, FPT Technology Development is offering incubation Since 2002 the government has been mainly facilities ( Please refer Box 11). involved in establishing IT clusters funded through budgetary resources where plots developed within 5.1.4.2 Anchor investors these clusters are leased to IT enterprises/IT office In most countries that have performed well in the space developers. IT sector, the growth has been contributed partly by domestic companies that have started small and The stock market in Vietnam is still in its develop- large established anchor investors seeking to expand ment phase with the Ho Chi Minh City Securities Trading Centre (HOSTC) and the Hanoi Securities Transaction Centre being set up in 2000 and 2005 respectively. There are currently around 60 listed enterprises with a market valuation of USD$3.5 billion. The listed enterprises comprise a mix of Box 11. IDG Venture Capital Fund public sector enterprises and private sector compa- nies engaged in manufacturing and food processing. International data group (Idg) had set up a USd$100 million None of the IT sector companies in Vietnam has It sector fund for Vietnam in 2005. Vietnam is the 4th country after USa, UK and China where Idg is providing venture capital been listed as of date. However, Vietnam's largest funding. Idg intends to leverage its China experience for its domestic IT player, FPT plans to list on HOSTC in Vietnam venture. the near future. Idg's focus is to invest in Vietnamese It enterprises involved in developing technology and providing It services in the areas of Venture capital (VC) funds have been available for internet. Vietnam's IT sector for the past 2 years when IDG Idg selects enterprises for investments based on (i) track record Ventures Vietnam ( a foreign enterprise) set up its of management team and (ii) evaluation of business plan. Idg's typical range of investment is 20% to 50% of the share capital local operations (Please refer Box 11). Recently in with a planned exit from the company after 5­7 years through August, 2006 VinaCapital, a local enterprise, has IPo/sale of shares, arranging merger with other It companies, announced the setting up the Vietnam Technology or other means. Idg has provided VC funding to the following Vietnamese enterprises till date: Fund with an initial capital of USD$50 million. The primary constraints for VC funding in Vietnam are Vinagames ­ a company providing online games; Vietnamworks.com ­ an on-line job search portal; the limited exit options on account of an under Peace Soft ­ an e-commerce enterprise; developed capital market system. iSphere ­ a software development company; Punch entertainment ­ developer of games for mobiles and Mobile Solution Services ­ provider of online services Vietnam has a well organized banking sector (Based on discussions with Mr. truong H. nguyen, VP/director dominated by state-owned banks. In the recent past of Business & technology development, Idg Ventures) foreign banks such as Citibank, and HSBC, have Country Case Studies 81 Box 12. FPT Incubation Program Box 13. Incubation Center at CRCM While the public sector incubators are providing incubation ser- the Center for research & Consulting on Management (CrCM) vices to promote the It sector of the country, the focus of the pri- started providing incubation facilities to It start-ups in 2004 vate incubators like FPt is to identify new business opportunities. when it received grants of USd$100,000 from infodev. the FPt supports the incubatees for a period of 1.5 to 2 years. If the incubation center operates out of a 100 square meter facility in venture is found to be commercially viable, FPt invests in scaling the Hanoi University of technology premises. Currently CrCM is up the business through one of its subsidiaries or as a separate supporting 2 full time and 5 part time incubatees involved in proj- division with the incubatee team being offered employment with ects including development of hospital management software, FPt. FPt has an annual budget of around USd$100,000 for the e-learning software,, software for telecom value added services, incubation center. software for monitoring road traffic, and web service for tracking family tree. the incubatees have been selected amongst univer- (Based on discussions with Mr. nguyen thanh nam, director, sity researchers/students with 2 being selected from a national FPt technology development) business plan competition organized by CrCM. Facilities offered to incubatees include: office space free of cost for 2­3 years Computers, local area network with internet Cash grants ranging between USd$1000­$2000 advisory services in accounting, legal, marketing organizing training & networking events to newer geographies to increase their competitive- CrCM has 4 It specialists for assisting the incubatees. In addi- ness. Thus, in India, the growth has been led by tion, professors and researchers from the university are invited for both Indian multinationals like Infosys, Wipro, as conducting seminars & events for the incubatees. well as global leaders including IBM, Genpact, SAP, (Based on discussions with Mr. Pham Minh tuan, Vice director, and Oracle. In China, too, prominent players in the CrCM) sector include local companies such as the Stone Group and the Legend Group, together with global companies such as IBM, and Microsoft. While Vietnam too has been able to attract a number of large IT hardware manufacturers like Power is supplied by state-owned power Intel, Fujitsu, and Canon, none of the global companies with most commercial buildings players in the software sector have set up develop- housing software enterprises and the Industrial ment centers in the country till date though they Parks having back up power generating facilities. cater to the domestic markets through imports/ Telecommunication services are provided by agency arrangements with local IT enterprises like state-owned telecom companies. Vietnam's FPT. international communication link is through 8 earth stations and 3 international switchboards 5.1.4.3 infrastructure linked to 3 international optical fibre networks, The enterprises in the IT sector are primarily namely, (i) Vietnam Post & Telecommunications located in and around the main cities of Vietnam, (VNPT) optical fibre network linking China and namely, Hanoi in the north and Ho Chi Minh City 4 ASEAN countries, (ii) SEA-ME-WE-3 (HCMC) in the south. The major IT hardware submarine cable linking 34 countries in Europe, units are located in Industrial Parks with Fujitsu Asia and America and (iii) Thailand-Vietnam- having its manufacturing facility in the Dong Nai Hong Kong submarine optical fibre cable Province, Canon in Hanoi and Intel's proposed unit network. VNPT operates the North-South coming up in an High Technology Park near optical fibre link which serves as the national HCMC. Most of the software enterprises are telecom backbone. As per our discussions with located in HCMC or Hanoi with domestic software Ministry of Post & Telematics representative, major FPT being headquartered in Hanoi having Vietnam intends to launch its own communica- developments centers at Hanoi, HCMC and tion satellite by 2008. Danang. Internet connectivity is available in all major cities across Vietnam. There are currently 6 The quality of physical infrastructure in the major Internet eXchange service providers and 16 cities like HCMC and Hanoi are adequate for the Internet Service Providers comprising both state IT Industry. owned enterprises and private sector players. 82 International Good Practice for Establishment of Sustainable IT Parks Vietnam is well connected by air with all key 5.1.4.4 Human resources cities having airports. Flights on domestic routes The availability of skilled workforce at low salaries are operated by the state owned Vietnam compared to other countries in the region has been a Airlines. Both Hanoi and HCMC have interna- key enabler in the growth of Vietnam's IT sector. tional airports with major international airlines (Please refer Figure 25 for comparative salaries for in addition to Vietnam Airlines connecting IT sector with other countries in the region). There Vietnam to all major cities across the world. are currently around 50000 engineers/graduates in The roads within the cities are well maintained the country with 25000 persons estimated to be with adequate public transport in terms of bus working in software firms. and taxi services. The cities are connected by the National Highway. Vietnam has around 70 universities and institutes Office/commercial space is available in modern offering engineering courses and bachelor degrees buildings mostly constructed by private sector with the course duration ranging between 4­5 years. developers offering facilities including basement In addition there are over 100 colleges and 50 parking, cleaning services, fire fighting, and informatics centers which offer diploma courses round-the-clock security. with the course duration ranging between 2­3 years. There are currently around 80,000 students enrolled While most of the investors with whom we interacted in various courses in these educational institutes agreed that Vietnam's infrastructure was adequate for with 15,000 students graduating every year. the growth of the IT sector, they felt that the current telecommunication infrastructure including quality There is a shortage of skilled persons required for the of internet services needs significant improvements if IT sector which has affected the growth of the the focus of the software sector was to provide BPO software industry sector in the country. As per the services like call centers and data processing for IT master plan till 2005 there was a requirement of overseas client. Another issue raised in this context 50,000 IT software professionals by 2005 with the was that the high cost of telecom services as com- requirement expected to increase to 100,000 by pared to other countries in the region. 2010. This skill shortage is likely to impact the country's vision of achieving USD$1 billion from Both HCMC and Hanoi are vibrant cities in the software sector by 2010. Vietnam having all facilities available in modern cities across the world including modern health- Almost all representatives of the IT sector compris- care facilities, educational institutions, entertain- ing local software enterprises, foreign invested ment, recreational facilities, and public transport. There are many expatriates living in these cities with their families. Facilities available in these cities include: Modern residential units in high rise apartment Figure 25. Comparative Salaries in buildings as well as villas are available on rent/ IT Sector lease. Both cities have numerous hotels in all star categories with global hospitality chains such Singapore 41512 as Hilton, Sheraton, and Sofitel operating Malaysia 21823 hotels. China 10095 Recreation facilities include shopping malls, India 9896 opera houses, restaurants & pubs, and movie Vietnam 6131 halls. Thailand 11340 Representatives of almost all foreign invested Philippines 12522 enterprise we met agreed that Vietnam is a politi- 0 10000 20000 30000 40000 50000 cally stable country with a good law and order USD/per annum record and their expatriate employees had no complaints with the quality of life in the country. Source: neoIT ­ Offshore and Nearshore ITO/BPO Salary Report 2006. Country Case Studies 83 companies, trade associations with whom we Consequently, almost all the large global IT interacted have raised concerns on the quality of companies, including those in developing economies skills of the students joining the industry. like China and India, follow global accounting and reporting principles, are listed on both local and The primary reason for skills not matching to global stock exchanges thereby having to comply industry requirements can be traced to the outdated with mandatory corporate governance principles, curriculum being followed by most universities/ have financing partners in the form of global colleges which offers IT courses which is not in line investment banks, venture capital/private equity with industry requirements. funds who are usually represented on the company's Board of Directors and are run by professional The need to rapidly build up English language skill management teams. sets especially in the context of business process outsourcing services like operating call centers for While foreign invested companies like Fujitsu and overseas client is also being felt by the industry. Canon follow corporate governance guidelines laid Another key concern raised was the shortage of down by their parent organizations, local IT experienced IT professionals, especially those having software companies are usually set up with promot- project management skills. The government is aware ers capital and are owner managed do not adopt of these problems and several initiatives have been corporate governance measures. The financial, taken by both government as well as industry. Some accounting and performance reporting practices of these initiatives have been illustrated in Boxes 14, followed by of these companies are reportedly non- 15 and 16. transparent, designed with the primary objective of minimizing payment of taxes. With the capital To overcome the skill shortage, large domestic markets still nascent, shares in majority of Vietnam's software companies like FPT and TMA Solutions 2400 companies change hands in unregulated over- are in the process of setting up Technology the counter markets. Universities which would offer courses meeting industry requirements. With the objective of introducing corporate governance measures, the government is offering tax 5.1.5 Corporate Governance and incentives for such companies to shift the trading of Management Issues their shares to the two stock exchanges. A new In most of the countries assessed as part of the study, securities law that is expected to come into effect in effective corporate governance has been observed to 2007 seeks to lay out standards of disclosure and be one of the consistent hallmarks of well-perform- governance for all companies. (Source: Bloomberg) ing economies, including the IT sector. 5.1.6 Government Policies and Implementation Mechanisms Government policies and interventions have played a key role in the development of the IT Box 14. Topic 64 training online Program on Information technology for Communi- ties ­ 64 provinces (topic 64) is being implemented under the guidance of Center for research and Consulting on Manage- ment (CrCM), Hanoi University of technology. Box 15. Vietnam Education the program involves updating the It courses offered and equip- ment in 64 government-run It training centers spread across Foundation the country. this initiative is being funded by Microsoft, USaId, Qualcomm and the state owned eVn telecom. eVn telecom will as part of this U.S.-initiated program, the Vietnam education provide internet access free of cost for a period of 1 year to all the Foundation is facilitating the association between 10 identified centers. CrCM will advise the It training centers till they have a universities of Vietnam with major technology universities in the sustainable business model in place. By the end of 2007, 30000 U.S. including Cornell and rice. Under this program the U.S. to 50000 students are expected to benefit from this program. university will share its curriculum which will be adapted by the Vietnamese university. the Vietnamese Universities will have to (Based on discussions with Mr. Pham Minh tuan, Vice director, maintain strict control on the standards of teaching and entry CrCM) criteria for these courses. 8 International Good Practice for Establishment of Sustainable IT Parks supporting actions such as lending to this Box 16. Partnership for Updating sector or attracting venture capital funds. University Courses Although Vietnam has an Intellectual property law that covers copyright protection of IT the Ministry of education & training, and the government of software, enforcement needs to be strengthened Vietnam have associated with select universities in UK, France, australia and US to update the curriculum of 7 identified Vietnam- given that over 90% of all packaged software ese technology Universities. this will involve updating of existing used in Vietnam is estimated to be pirated. courses and introduction of new courses in line with the It courses currently being offered by the partner foreign university. 5.1.7 Potential Growth Opportunities for the Vietnam It Sector Before attempting to identify specific recommenda- tions for development of the IT sector in Vietnam, it is imperative that the current and potential market sector in Vietnam. The government has been opportunities available to companies operating in actively promoting investments in the software this sector are identified. Based on our assessment of industry through enacting specific policies for the the sector, the following represent potential op- sector. A high-level assessment of the applicable portunities that can possibly be targeted. policies has been presented in Figure 26 on the next page. IT hardware assembly and re-export operations, where Vietnam benefits from a strategic In addition to policies for facilitating development geographic location which is being leveraged by of the IT sector, case studies of successful countries global players for serving their Asia Pacific like Singapore, China, and India have also demon- markets. The availability of engineering strated the importance of having efficient imple- graduates at annual salaries ranging between mentation mechanisms. There appears to be USD$6,000­$7,000 as compared to USD significant scope for improvement on this front as $9,000­$10,000 in India and China also adds far as Vietnam is concerned. Some of the representa- to its competitive advantage. The hardware tive areas which present opportunities for streamlin- sector revenues have doubled since 2002 ing have been highlighted below. resulting in a CAGR of 20%. A year-on-year growth of 50% was recorded in 2005, primarily Effective coordination is required among driven by growth in exports. With the expan- various government ministries, agencies, and sion plans of existing players like Canon and departments in formulating and implementing new entrants like Intel setting up facilities in policies benefiting the IT sector in Vietnam. the country, it is expected that the current levels Currently, various ministries and departments of growth through exports in this sector will at both national as well as provincial levels have continue in the near to medium term. The different roles and responsibilities in promoting domestic demand for computer hardware the IT sector. For example while MPT is products is also expected to grow at 15% to currently responsible for ensuring overall 18% annually as more businesses including the growth of the IT sector in Vietnam, MoST is financial sector goes for increased automation. responsible for overseeing the development of The domestic hardware market is currently IT Parks. It is understood that the development dominated by local hardware assembly opera- of IT parks like Quang Trung and Saigon Hi tions like FPT and CMS. These local players Tech Park near HCMC has been largely also represent global hardware companies as through initiatives taken by the People's resellers of the global players such as Toshiba, Committee of HCMC with MoST having a NEC, and HP with none of the global players limited role. having manufacturing operations for serving Absence of formal financing channels for local the domestic computer hardware market. IT companies need to be addressed. Specific Recently Intel has made a strategic investment policies may be required to encourage these of over USD$36 million in FPT to take enterprises to list on stock exchanges. advantage of the growth in the domestic Incentives may also be given to banks for hardware market. Country Case Studies 85 Figure 26. Government Policy Instruments broad classification illustrative interventions Fiscal policies Business Income tax (BIt) rate of 25% is applicable for software enterprises in Vietnam (usual tax rate is 28%). BIt rate is further reduced to 20% and 15% for software enterprises investing in geographic areas with difficult socio-economic conditions and particularly difficult socio-economic conditions respectively. reduced BIt rate of 10% is applicable for software enterprises that have been set up under the provisions of law on Foreign Investment in Vietnam. all software enterprises enjoy exemption from business income tax for a period of 4 years from the date when taxable income is first produced. newly established software enterprises are entitled to reduced BIt rate of 10% for the first 15 years of opera- tions. additionally, these enterprise are exempt from BIt for 4 years commencing from the time they have tax- able income and also benefit from a 50% reduction in the amount of BIt due for the following 9 years. no export tax is levied on export of software products. no Value added tax (Vat) is imposed on software products and services produced and sold in Vietnam. no import tax for import of materials (not produced by domestic manufacturers) directly serving software product manufacturing operations. Specific tax breaks for locating unit in designated software/hardware parks: uang trung Software City (QtSC) and Saigon Hi-tech Park (SHtP) ­ BtI rate will be 10% for duration the project remains located in QtSC/SHtP. tSC, SHtP and Hoa lac Hi-tech Park (HHtP): exemption from Business Income tax for 4 consecutive years start- ing from first taxable profit making year and 50% reduction for the next consecutive 9 years. SHtP ­ exemption from payment of import duty and Vat for machinery, equipment, construction material that are not locally produced for units located within SHtP. innovation policies BIt exemption for income earned from scientific research and technological development, products manufac- tured during test production and products made from technology applied for the first time in Vietnam. expenses incurred on scientific and technological research, innovations and initiatives (even if in the nature of capital expense) is allowed as a deductible expense during computation of income tax Intellectual Property rights protection to computer programs and compilation of data, as well as layout design of semi-conductor and integrated circuits 50 year protection under copyright and 20 years for invention patents. Human capital policies as part of Vietnam's development objective till 2010 the courses offered in information and communication technologies at universities shall be comparable to that offered in advanced aSean countries. 80% of gradu- ates undertaking these courses shall have adequate professional qualifications and foreign language knowledge to participate in the international It market. government is encouraging universities to ensure the medium of instruction for ICt courses is english and adopt policies to attract foreign teachers conversant with english language. to attract foreign professionals, the threshold limit over which personal income tax has to be paid by foreign- ers is around Vnd 8 million a month (Vietnamese nationals have a threshold limit is Vnd 5 million). In addi- tion, foreigners are subject to lower tax rates Vietnamese nationals directly participating in software manufacturing and service operations enjoy the same benefits in personal income tax threshold and tax slab rates as foreign nationals resident in Vietnam investment climate government in its development objective for 2010 has announced its intention to create a favorable environ- policies ment in order to become an attractive and reliable investment destination for foreign investors, especially for large ICt conglomerates. 100% FdI allowed in It and foreign investments is encouraged in technology and r&d. Investment licenses issued are valid for a period 50 years which can be extended to 70 years. Joint Venture or foreign enterprises engaged in infrastructure development on Bot basis are exempt from BIt for 4 consecutive years commencing from the year in which it makes first taxable profit and will enjoy 50% reduction in BIt for the subsequent 4 years. In case these enterprises are involved in developing infrastructure for It sector, the BIt exemption period will be 8 years instead of 4 years commencing from the year in which it makes first taxable profit. these enterprises are also exempt from import duties for imported equipment and machinery used in their projects. department of Planning and Investment (dPI) is the single window facility for issuing Business licenses. dPI also guides potential investors on matters such as legal documentation requirements. the one stop service facilities at select It Parks like QtSC & SHtP are authorized to receive applications and forward them to dPI one-stop service at QtSC, SHtP and HHtP, which simplifies all investment procedures, including obtaining investment licenses, on-site customs office, procedures of land provision and land lease, constructions permit, visa, and housing Benefits specific to QtSC and SHtP: Foreigners and overseas Vietnamese working in units located within the parks and their family members, will receive multiple entry visas for the period they continue to work in QtSC/SHtP government-promoted It Parks like QtSC & SHtP follow a one price lease policy. the lessees have the right to pledge land use right and assets related to land as collateral. double taxation avoidance treaties with 38 countries, including key It markets like australia, Singapore, South Korea, Japan, UK, France and germany. agreements with Malaysia, Indonesia, China, thailand, Singapore and Philippines for `Specially preferential treatment in trade relations'. 8 International Good Practice for Establishment of Sustainable IT Parks Domestic IT services and software sector, driven appropriate mechanisms to curb software piracy primarily by the requirements of the financial are implemented. services sector and e-Government program Vietnam is well placed to offer back office which is being revived by the government. transaction processing services like finance and Already global majors like Oracle and local accounting, payroll processing, insurance claim players like FPT have been contracted to develop processing, and other rule based processing the software for the World Bank funded Treasury services to US and EU based organizations, on & Budget Management Information System by account of a sizeable population of overseas the government. Currently, the IT software/ Vietnamese in these countries coupled with a services sector, with revenues of USD$250 favorable time zone difference. However, to million in 2005, is small compared to IT effectively develop this sector, the twin issues of hardware sector, despite having grown at a i) ensuring adequate supply of skilled manpower CAGR of 29% over the past 4 years. Export and ii) improving quality and reducing cost of revenues primarily from software development international data & voice connectivity will activities at USD$70 million in 2005 is largely have to be overcome. Consequently, this insignificant. Currently, exports are driven by segment of the market is likely to develop over software companies set up by overseas the medium term with adequate government Vietnamese mainly serving markets in USA, support. EU and Japan. With Vietnam obtaining WTO membership and having enacted Intellectual 5.1.8 Identification of Issues and Property Protection laws in 2005 (applicable Growth Strategies from July, 2006), it is expected that the domestic Having identified the potential growth opportuni- market for packaged software will achieve ties for the Vietnamese IT sector, it also becomes significant growth in the medium term once necessary to identify market participants who are Figure 27. IT Sector Growth Segments & Strategies potential growth segments identified issues recommended growth strategies Short term Hardware Market currently leveraging presence of Canon, Fujitsu and Intel, focused targeting of global It players such dominated by as HP, dell, and IBM to establish assembly units to serve the asia-Pacific regions as well Foreign invested as the domestic market It hardware as- Presence of global It majors in Vietnam is expected to have a positive rub-off on It semblers Services, captive software development Implement measures and mechanisms to curb software piracy. this will ensure that global Software applications in & local software players are encouraged to market off the self software products in the development & finance & account- domestic market System integration ing, payroll, etc. encourage use of established packaged application software in domestic businesses to services from local software facilitate compliance to good practice in performance management & reporting, offer developers for standardized training platforms to It professionals which can then be leveraged for export domestic market markets as well as exports long term BPo Services Market currently Facilitate entry of global BPo services companies like IBM, genpact, accenture, Wipro, dominated by tCS, etc. by offering them favorable incentives like subsidized lease rentals for locating local companies in It Parks with inadequate encourage domestic companies to partner with global companies for offering BPo servic- scale of operations es, sharing of good practice, quality accreditations like SeI CMM ­ this will help domestic and limited market companies build capabilities which can be leveraged for export markets reach Facilitate competition in the telecommunication sector to ensure world class communication infrastructure at competitive prices Undertake reforms in the education sector to ensure adequate supply of skilled professionals Country Case Studies 87 well placed to drive growth in the respective areas, human resources is expected to be a problem in together with potential strategies for development, any other region. based on identified good practice in other countries Simplified policy implementation mechanisms in assessed as part of the study. terms of single-window approval facilities in areas such as operating license, sanction of building 5.1.9 Role of IT Parks and Proposed plans, and tax and customs duty registrations. so Business Models as to cut down significantly on the time for As has been demonstrated by the case studies, the key setting up new/expansion operations. requirement underlying setting up of sustainable IT High quality physical connectivity and infra- parks is the ability to attract credible occupants to the structure including air (both international and park, with business models that demonstrate sustain- domestic), road and rail connectivity, a combina- able viability. Consequently, having credible anchor tion of multi-tenant buildings with contempo- investors in the park has been identified as an essential rary facilities and build-to-suit options, adequate prerequisite for success both in developed as well as road & other surface transport connectivity with developing countries. In the current section, we have the adjoining city, intra-park roads, sewerage, attempted to present our assessment of the critical and electricity. business enablers for IT Parks in Vietnam, based on Lease or sale of land for built to suit facilities at the case studies of parks in other countries including rates lower than those prevailing in the adjoining Vietnam as well as ground realities in Vietnam. city. State-of-art virtual connectivity in terms of data The generic critical business enablers likely to feature and voice infrastructure including international in the expectations of all categories of IT companies connectivity. have been highlighted below. In addition, there are a number of potential value Location of the park in an area that permits it to drivers which are expected to impact specific types of leverage the existing urban and social infrastruc- IT companies, with the level of interest also expected ture of the two key cities, namely, Hanoi and Ho to vary across different categories of IT players Chi Minh City HCMC, as availability of skilled (please refer Figure 28 in the next page for details). Figure 28. IT Parks ­ Segment-Specific Drivers type of it companies Key value proposition of it parks, if any local hardware Motivating factors: Incremental fiscal concessions like reduced rate of business income tax assemblers delimiters: existing investments in infrastructure; proximity to markets global hardware Motivating factors: reduction in time to market, for new entrants; Strategic geographic location for players serving regional export markets; Fiscal concessions; need for state of art facilities for facilitating ac- creditation; lower investments in ancillary infrastructure & facilities management; linkages to engineering institutes; Facilities for expatriate staff ; delimiters: existing investments in facilities local software & It Motivating factors: reduction of time to market for expansions; Fiscal concessions; Built to suit options for services companies custom development centers; need for state of art facilities for facilitating accreditation; domestic venture capital/private equity support; lower investments in ancillary infrastructure & facilities management; incubation facilities delimiters: existing investments in infrastructure for players with existing development centers; proximity to domestic clients; proximity to urban centers global software Motivating factors: reduction in time to market for new entrants/expansions; Fiscal concessions; Built to & BPo companies suit options for custom development centers; need for state of art facilities for facilitating accreditation; lower investments in ancillary infrastructure & facilities management; linkages to colleges/universities/It training institutes; 88 International Good Practice for Establishment of Sustainable IT Parks Most of the foreign invested IT hardware assembling existing scenario in Vietnam, based on the countries units such as Nidec and Canon already operate out analyzed as part of the study. For purposes of of industrial parks with the park management analysis, the good practice have been categorized ensuring provision of basic facilities including into i) policies for developing the IT sector in the quality uninterrupted power supply, water & country and ii) policy good practice for develop- sewerage treatment, telecommunication facilities, ment of IT Parks. Figures 29 and 30 below outline and single window clearance facilities covering relevant policy good practice for facilitating import & export processing formalities. Intel has development of the IT Sector and IT Parks respec- announced plans to set up its proposed unit in the tively. As has been assessed during the study, IT Park Saigon Hi Tech Park. However, domestic IT occupants are offered a set of additional benefits companies generally operate out of offices located in over and above those available to IT companies not the cities of HCMC and Hanoi due to its proximity operating out of IT Parks. Consequently, the policy to their clients as well as employees. With these good practice highlighted for IT sector development cities offering the same telecommunication infra- would also be applicable to IT Park occupants, other structure as the IT Parks, these companies do not than in cases where additional concessions have been have much motivation to relocate to IT parks envisaged in a specific area. excepting for those having expansion plans. It is expected that in the long term IT Parks will be The measures outlined below only represent good required in Vietnam for accommodating global IT practice adopted by other countries covered as services players/large domestic players like FPT for part of the study. Consequently, these can at best setting up their software development centers and be treated as starting points and additional BPO facilities. analysis would be required for assessing their budgetary & other impact for customizing these The IT Park case studies and primary interactions to meet the requirements of Vietnam, should the with various stakeholders clearly demonstrate a case government decide to consider any of these for for management of the IT Parks to be vested with implementation. private sector players for ensuring adequate accountability and efficient service. Possibly, as has been the case in many other countries, existing facility management companies such as C B .2 Country Case Study: Richard Ellis and Trammell Crow with the requisite Russia financial wherewithal for developing such projects. Consequently, a facilitation role is recommended for the government other than in situations where 5.2.1 IT Sector: Contribution to GDP The Russian economy is estimated to have grown at the land is owned by it. In such situations, the an average rate of 6.1% during the period from government can possibly pick up an equity stake in 2001 to 2005 (Source: Goskomstat), with the the development company, given that financial growth rate marginally slowing down to around returns on IT parks have been fairly attractive. 5.6% during 2006. The 2005 GDP was USD$768 billion (RUR before 1998). The economy is 5.1.10 Policy Good Practice which expected to continue to grow at around 5% during can be Leveraged the period from 2006 to 2010 (Source: In almost all the countries assessed under this study, Datamonitor). it has been observed that government policies have played a pivotal role in the development of the IT The growth in the economy has been fuelled sector. The role of government in most countries has primarily by sectors like oil and gas (around 14% of also been observed to evolve over time, with a more GDP in 2005) and trading (28%). In 2003, around direct role during the initial stages of sector develop- 11% of the global crude oil supply was contributed ment gradually moving to a facilitative role with the by Russia. Consequently, consistent increases in picking up of private sector led growth. crude oil prices during the last 5­6 years has positively impacted GDP and foreign exchange The current section of the report highlights policy earnings growth. The country had a positive trade good practice that can be leveraged given the balance of USD$143 billion during 2005, with Country Case Studies 89 Figure 29. Policy Good Practice for IT Sector Development Key issues/recommended Strategies for Vietnam policy Good practice which can be considered encourage large global It Fiscal Incentives hardware companies to extend reduced business income tax rates of 10% for export oriented foreign invested It hardware establish assembly units for units even if they are not located in designated technology Parks/Special economic zones. serving global markets Introduce specific financing schemes targeted at domestic It services & BPo companies possibly through state owned banks for supporting them to scale up operations. the government may estab- encourage direct presence lish a special fund to refinance bank lending to the sector. of large global It services & exempt business income tax/charging reduced rate of tax on capital gains made from sale of equity BPo companies in listed domestic It companies to encourage Venture Capital/Private equity funds to invest in the It sector. this is likely to enable domestic It companies obtain funds to scale up their operations and encourage domestic players achieve critical business volumes to partner with global players. in It services & BPo com- panies to expand existing Innovation Policies operations to increase scale reimburse part/full initial expenditure incurred by domestic It companies in obtaining quality ac- of operations creditation (SeI/CMM/BS 7799) from a special fund established by the government. this scheme may be applicable to those companies obtaining quality accreditation within a specific timeframe, development of financial say within next 3 years. services sector for meeting establish dedicated tribunal for dealing with disputes relating to infringement of copyright, patents on funding requirements of designs for It companies. the tribunal to ensure that cases are resolved within a specified timeframe. companies as well as im- proving levels of corporate Human resource Policies encourage private sector investments/public-private partnership through income tax concessions enforcement of intellectual in establishing finishing schools to train final year students of graduate courses with requisite skills property rights for encour- required for It services and BPo sector. aging growth of domestic establish a high level multi-disciplinary committee to track the changing need of It sector and future software market demand of skills and recommend changes in curriculum for schools, colleges, and universities. Such a committee should include members from various government departments/ministries such as Min- Streamline policy implemen- istry of education, Ministry of Post & telematics, and Ministry of Science & technology and industry tation mechanisms representatives (e.g., HCMC Computer association, Vietnam Software association). Investment Climate encourage e-commerce in the country through introducing enabling laws for establishing legal valid- ity of electronic signatures, institutionalizing the process of issue and certification of digital signatures, preventing potential abuses of computer systems for enabling e-commerce transactions in line with similar laws enacted in China, India, Malaysia, Korea and Singapore. allow foreign direct investment in telecom sector and remove entry barriers of foreign telecom players for investing and participating in management of existing telecom companies. Special tax concessions like reduced rate of Income tax for specified period, import duty exemptions for capital equipment may be considered for global telecom players willing to invest in telecom infrastructure required for the growth of the It sector in the country. Implement a single window mechanism for providing all benefits, concessions & permits to It com- panies. this would require a single agency within government to be identified as the nodal agency, with a presence in all key cities, which would then process applications seamlessly in coordination with other Ministries. extend all the above concessions to local companies, subject to completion of listing on Vietnamese Stock exchanges within a pre-defined period and extend additional fiscal benefits on successful listing on international stock exchanges. Formulate policies for attracting global venture capital and private equity funds like exemption of tax on income from investments and allowing losses to be deducted from other taxable income. deepen existing capital markets through measures such as demutualization, attracting large global financial institutions, and investment banks. around 48% of total exports being contributed by USD$11.35 billion, or 1.5% of GDP. While this is crude oil and petroleum products. Machinery, significantly lower than countries like China and equipment and automobiles accounted for around India where the sector contributes 4%­5% of GDP, 39% of 2005 imports. the Russian IT sector has shown significant growth during the period from 2001 to 2005, with a CAGR The services sectors accounted for around 57% of of 29% during this period (please refer Figure 31 GDP in 2005, with the IT sector contributing below). 0 International Good Practice for Establishment of Sustainable IT Parks Figure 30. Policy Good Practice for IT Park Development Key issues/recommended Strategies for Vietnam policy Good practice which can be considered attract global It services Fiscal policies and BPo services players offer additional business income tax rate concessions/longer income tax exemption periods to It to It Parks by offering ready Park occupants, in line with QtSC and SHtP. to occupy facilities thereby Provide land owned by government for development and to It Park occupants at subsidized rates, reducing time to market for depending on level of employment generation. new entrants Support It Park developers by subsidizing rentals for plug & play infrastructure and land lease rates for an initial period (say 3 years), so that a part of these subsidies can be passed on to potential ensure domestic It Services occupants, thereby creating a differentiation viz. a viz. normal office/commercial infrastructure. & BPo services players occupancy in It Parks Investment Climate through additional fiscal Permit mixed land use in It Parks by earmarking a proportion of the total land for commercial (say concessions 70 %) and residential (say 30 %), thereby improving project viability. Implement a single window mechanism for fiscal concessions & benefits, as well as all required encourage private sector statutory approvals, with a physical presence in the Park. real estate players to invest extend all the above concessions to local companies, subject to completion of listing on Vietnamese in It Parks/It Park Manage- Stock exchange within a pre-defined period and extending additional fiscal benefits on successful ment companies listing on international stock exchanges. extend special concessions to all financial entities like banks, financial institutions, venture capital and private equity funds located in the It Park. representative concessions/benefits include tax exemption on income of such units for an initial number of years (say 5 years). 5.2.2 it Sector: Growth, composition and were developed but penetration of IT continued to trends be limited. Even in the eighties, usage of computers The Russian IT industry dates back to 1940s & 50s, was limited to premier research & development when the sector was dominated by the government institutes and academic institutes. with little or no private sector involvement and the focus was primarily on military and industrial It was only during the nineties that the extent of IT applications. During the 1960s and 70s, computer penetration started increasing rapidly. This decade hardware compatible with global technology trends also saw the emergence of private sector companies, including investment by global players like Sun Microsystems and Motorola. Most of these global players established their offshore R&D centers in Russia in an attempt to leverage the expertise and skill base of Russian professionals from premier Figure 31. GDP and IT sector Universities and centers of excellence. 1000 2.0% The growth of the IT sector has continued in the 1.58% 1.48% 1.51% current decade, with the turnover of the sector 800 1.43% 1.26% 1.33% 1.5% estimated at USD$11.35 billion during 2005. 600 According to the Ministry of Information 1.0% Technology and Communication, the sector is 400 estimated to grow to USD$40 billion by 2010, 0.5% translating to an expected CAGR of 31%. Key 200 constituents of the sector have been discussed below 0 0.0% (please refer to Figure 32 below for details). 2001 2002 2003 2004 2005 2006 (E) Nominal GDP IT Sector share of GDP IT hardware, which contributed USD$7.72 Source : Goskomstat, IDC & WEFA-WII billion to overall sector revenues, accounted for Country Case Studies 91 large part of this segment is accounted for by Figure 32. Composition of the global majors like SAP, Oracle and Microsoft. Russian IT Sector However, there are also a number of niche local products in areas such as finance & accounting and IT security developed by companies such as 16 Kaspersky Labs, 1C, and Diasoft. 14 12 CAGR 29% 9.09 10 7.72 A listing of the top 10 IT companies has been 8 6.34 presented in Figure 33 alongside. Most of these 6 companies are located in the three top cities, 3.17 3.64 namely, Moscow, St. Petersburg and Novosibirsk 4 2.97 1.38 2.36 2 1.16 1.87 (please refer Figure 34 for details). These three 0.61 0.74 1.07 1.27 1.53 0 cities housed around 75% of all IT companies in 2002 2003 2004 2005 2006 (E) Russia. Hardware IT Services Packaged Software Source : IDC Blackbook; Euromonitor As on 2005, 74% of the IT companies present in Russia in 2005 were headquartered in Russia, 10% in other CIS countries, 10% in USA and another 5% in Europe (Source: Outsourcing Russia & Russoft). 5.2.3 IT services exports around 67% of annual IT sector revenues. Aggregate IT services exports from Russia were Global majors like HP, Dell, Lenovo (IBM) estimated at around USD$1 billion in 2005, dominate the market, with most of them operat- translating to a CAGR of over 50% during the ing through local partners like IBS, R-Style, period from 2000 to 2005 (please refer Figure 35 for Croc, Optima, TOPS and Merilon. We details). Some key trends in the exports market have understand that other than a few players like been highlighted below. Sun Microsystems which undertake direct imports for onward selling within Russia, Most Key export destinations include U.S. and Canada other global players use their local partners for (38%), Germany (11%), Australia & Switzerland imports. Russia currently has limited chip (15%) and Scandinavian countries (6%). IT fabrication activities in the Zelenograd region Services exports to Finland, Sweden, Norway near Moscow, led by companies like Mikron and Angstrem. IT services, with a turnover of USD$2.36 bn during 2005, accounted for 21% of sector turnover. Many of the hardware resellers like Figure 33. Top 10 Russian IT IBS, R-Style, Optima and Croc. have made a foray into this segment by offering system Companies (2005) integration (including package implementa- tion) services. However, there are other revenue, no. of companies like EPAM, Telma, Galaxy and company 2005 (mn) employees Opente@ch which focus exclusively on IT Merilon 1026.7 970 nCC 838.9 1836 services. There is yet a third category of IBS 751.1 4468 companies comprising global players like Intel, laboratory of new It 635.6 2500 r-Style 572.6 2270 Sun Microsystems, Motorola, Samsung, Intel, technoServe 562.9 909 and Cadence which have their development Ultra electrony 535.9 800 Kvazar-Micro 514.4 1300 center in Russia and contribute to IT services Verysell 435.9 650 exports. Croc 391.5 851 Packaged software (2005 turnover: USD$1.27 * 1 USd = 27 rubles billion) contributed 12% to sector turnover. A Source: Cnews analytics, 2006 2 International Good Practice for Establishment of Sustainable IT Parks were primarily from companies based in St. Figure 34. Location of IT Companies Petersburg (Source: Outsourcing Russia, Russoft). (2005) In terms of industry verticals, Telecommunications (30% of total export revenues), Banking & Financial Services (27%) Others and public sector/government (21%) accounted 19% for around 80% of total exports in 2005. Kazan 2% Large Russian IT companies like EPAM, Luxoft and Opente@ch Group. accounted for around Tomsk 50% of total exports in 2005 (please refer Figure 2% Moscow 38% 36 for details). The different types of IT Services Nizhny offered by these players include application devel- Novgorod opment & maintenance and system integration. 3% On the other hand, the captive R&D /develop- Novosibirsk ment centers of global players like Intel, Sun 10% Microsystems and Motorola accounted for St Petersburg 26% around 21% of the exports. From our interac- tions with some of these companies, we under- Source : Outsourcing-Russia, Russoft stand that a large number of these centers are involved in high end areas including system software development, wireless technologies, and Figure 35. IT Services Exports software quality assurance. Box 17 on the next page details the activities of the captive offshore centers of Intel and Sun Microsystems. The total 1400 1306 deployment at these centers is estimated at over 1200 5,000 currently, comprising primarily PhDs and 1000 972 engineers from reputed institutes (please refer 800 764 Figure 37 for details) 600 546 There are also some midsize and small companies 400 352 like PROject MT and Reksoft,. which provide IT 200 126 191 and BPO services, such as custom application 0 development, package implementation, system integration, payroll processing, translation services Source : C News Analytics, Russoft & Outsourcing Russia to international clients in an off-shore mode. The total employment in the IT services sector was Figure 36. Exports by Different estimated at around 60,000 at the end of 2005, with Players around 20,000 people involved in IT services exports. Consequently, the average annual revenue per employee is estimated at USD$50,000 for IT Universities & Scientific Research Institutes services exports, which is similar to realizations in Midsize & Small the domestic market. 7% companies 18% 5.2.4 Past government initiatives for Informal groups & individuals development of the IT sector International 4% Development As has been indicated, the IT sector only started Centre gaining momentum during the nineties with a 21% number of global players like Intel and Sun Major Russian Microsystems setting up operations, and the Companies emergence of local companies which initially started 50% with hardware selling/reselling and gradually Source : Russoft expanded into IT services. Consequently, Russia's Country Case Studies 93 key ICT indicators are comparable with countries like China and India (please refer Figure 38 below Figure 37. Manpower Deployment in for details). With physical and virtual infrastructure Captive Development Centers in Russia not being available in a uniform manner throughout the country, given the vast geographical area, the company employees government had, in the past, set up a number of Intel russia 1100 Techno Parks to provide a fillip to research & Motorola 500 Scala CIS (epicor Scala) 380 development with a focus on sectors including deutsche Bank 350 nuclear technologies, security systems, electronics, Borland 350 telecommunications, and new materials. Examples Sun Microsystems 350 Quest Software 300 include the Science Cities in Obninsk, Puschino and allied testing 220 Dubna near Moscow, and in other regions and cities Chrysler 200 dell 200 such as Tomsk and Novosibirsk. alcatel 200 nival Interactive Inc. 150 electronic Microsystems Software development 100 However, as was the practice in most other coun- ericsson 100 tries, these Techno Parks were not focused on the IT InterSystems 100 sector in particular. Instead, the focus was applied egar technology Inc 100 lg rlrctronics russian r&d Center (lg Softlab) 100 research with IT being used more as a tool than as Cadence design Systems 100 an end product or service. Most of these parks devel- Siemens 100 t-Systems CIS 78 oped around prominent academic institutions or aVIcode Inc. 50 centers of excellence to facilitate cluster effects, as Samsung research Center 50 targem Studio (a part of nival Interactive Inc.'s 40 they inevitably required close linkages with such development Center since 2005) institutions. Thus, for example, the Moscow State Jensen technologies 38 University Science Park developed around the SmartPhonelabs 20 ariasys 18 Moscow State University and Dunba Science Park rd-Software 15 was developed near the Joint Institute of Nuclear Source: russoft Research, Dubna. Box 17. Captive Development Centers in Russia intel Intel commenced operations in russia in 1993 by contracting 10 programmers. In 2000, it opened a development lab near nizhny novgorod to capitalize on the proven talent of mathematicians deployed earlier at the Sarov nuclear weapons research facility. Since then, the company has been expanding its r&d activities in russia. In 2004, it bought out two technology firms it had been working with earlier, elbrus and UniPro, bringing its total number of employees in russia to around 1100. Intel currently has operations in St. Petersburg, novosibirsk, Moscow, Sarov and nizhny novgorod. the development centers in russia are used for addressing important research challenges, such as development of software for wireless technologies, optimizers, and compilers closely integrated with the new generation processors being developed by the company. As discussed with Mr. Steven Chase, President ­ Intel Russia Sun Microsystems Sun Microsystems has been present in russia since 1994. It currently has two main centers, one in Moscow and the other in St. Peters- burg. the Moscow center mainly concentrates on the sales & distribution activities of Sun's products in the CIS region (other than Baltic region). Sun Microsystems russia sells the entire range of products that the company manufactures including servers, desktop systems, storage devices, and associated software. the products are sold through russian partners such as Croc, open technologies, and techno Serve and through distributors like Versell and oCS. In June 2004, Sun Microsystems established its development Center in St. Petersburg, russia, with a focus on software engineering efforts in JavaTM technologies, developer tools, as well as networking and operating systems. the other global development centers of company are located in Prague (Czechoslovakia), Bangalore (India), tel aviv (Israel) and Beijing (China). the company has invested around USd$10 mn in the center in St. Petersburg, which houses more than 300 employees. Its research focus includes Java aPI devel- opment, SParCTM and aMd opteronTM compiler enhancement, Ide development, Java and xMl compatibility testing & development, and software quality assurance. As discussed with Mr. Chris Morris, CFO, Sun Microsystems International Good Practice for Establishment of Sustainable IT Parks Figure 38. Key ICT Indicators for Russia czeck united parameters china india rep. poland rumania ukraine russia States Social indicators total Population (millions) 1296 1080 10 38 22 48 143 294 Urban Population (%of total population) 40 29 74 62 55 67 73 80 ict Sector indicators Access: telephone lines (per 1000) 241 43 331 321 198 230 261 606 Internet users (per 1000) 73 23 265 235 184 62 91 569 Personal computers (per 1000) 40 11 196 127 83 20 113 760 Mobile Subscriber (per 1000) 258 48 1059 603 464 285 517 615 Population covered by mobile 73 41 99 98 97 75 78 95 telephony (%) Quality: Broadband subscribers (per 1000) 16.5 0.6 16.5 32.7 0.7 0.0 0.9 129.1 International Internet Bandwidth 57 4 2450 340 107 17 101 3308 (bits/person) Affordability: Price basket for fixed line (US$/month) 3.6 3.2 16.7 17.3 9.6 2.5 7.8 25 Price basket for mobile (US$/month) 3.7 3.2 15.1 7.7 8.8 10.3 6.3 10.8 Price basket for internet (US$/month) 10.1 8.7 20.8 15.7 25.3 16.7 10.0 15 ICt expenditure (% of gdP) 5.3 3.7 6.5 4.5 2.8 7.0 3.7 8.8 Source: World Bank, UndP, ItU and others. While the government initiated a number of large Russian IT companies like IBS, NCC, Kraftway measures for overall economic development during and Optima derive a significant portion of their the eighties and nineties, like allowing foreign direct revenues from government projects/initiatives. investment and privatization of state owned enterprises, these were not focused on any sector in We also understand that the government has particular. Consequently, unlike many other recently started to focus specifically on the develop- countries, the IT sector in Russia does not enjoy any ment of sectors like IT and bio-technology. To this additional benefits in terms of favorable fiscal, effect, it is in the process of setting up parks focused innovation or human capital policies. on these sectors with state of art physical and virtual infrastructure. Some of the existing techno parks However, in 1997, the government, in its bid to like the Moscow State University Science Park improve transparency and accountability, and (MSU) have also started reorienting themselves to augment citizen service delivery, launched e- meet the requirements of the IT sector, with many Governance initiatives across various ministries and of their recent occupants being new companies functions. Representative programmes include E- focusing on the IT sector. Details on MSU is Petersburg, E-Altai, and E-Chuvashia initiated by provided in sub-section 5.2.4.1. different city governments. Aggregate government spending on IT was estimated at USD$2 billion The government is also undertaking a program for during 2005, with IT initiatives encompassing key setting up Techno Parks in seven locations, namely, ministries like the Ministry of Finance/State Treasury, Moscow, Novosibirsk, Nizhny Novgorod, Kaluga, Ministry of Education, Ministry of Property/State Tumen, Republic of Tatarstan and St. Petersburg. In Land Survey, Ministry of Health. A conscious policy addition to core business facilities, some of these of awarding preference to domestic IT companies has parks are also expected to include ancillary facilities been followed during implementation of the e- like residential and commercial complexes. These Governance initiative. Consequently, many of the parks are proposed to be constructed during the Country Case Studies 95 period from 2006­2010, with an estimated Many of these companies operate as sub-contrac- investment of 100 billion roubles or USD$4 billion. tors/outsourcers to larger IT services companies such It is understood that these parks would also focus on as Alpana, Arsenal, Park, and RSCI. The park other high technology sectors such as nanotechnol- management provides a number of value added ogy and biotechnology with the primary focus of the services to the occupant companies, depending on government being on creation of infrastructure to their level of maturity. MSU organizes workshops & support the development of these sectors. seminars, conducts business plan competitions and provides general consulting services to encourage 5.2.4.1 techno park case study ­ Moscow entrepreneurship in the field of innovation and State university Science park technology. MSU provides the following services to The Moscow State University (MSU) Science Park start-up companies: was set up in 1992 by the Moscow State University, with sponsorship from the Russian Federation Advice on business & financial planning. Ministry of Science and Foundation. The mission of Guidance on issues relating to technology MSU is "stimulation of innovation activities in the transfer. university and in the region". The main objectives of Assistance in attracting preferential financing the MSU science park are to: (including government allocations), as well as venture (seed) Investment. Create favorable conditions for scientists, Accounting and auditing services. students and graduates to start business. Assistance with searching for strategic partners. Build a framework for business in cooperation Assistance in arrangement of exhibitions. with the University. Training in areas like marketing, accounting and Help start-ups and small and medium businesses intellectual property requirements. in development through providing consulting services. The park also provides the following value added services to other occupants: Capital: The estimated total investment in MSU was around USD$14­15 million. It is managed by a Assistance in raising funds. 15 member dedicated management team comprising Advice with respect to business-planning, financial directors, marketing managers, students business evaluation and financial planning. and other MSU representatives. There are around 45 Foster cooperation between companies and companies located in the park. Garant, an IT Moscow State University. company which translates Russian legislation and markets it online, is one of the main tenants. Other The Park is a member of various associations like relatively larger players include ISS, which develops Union of Russian Innovation Technology Centers security software, Rambler & Aport, which are (ITC), Russian Association of Venture Investment search engines and Redlab, an IT services company. and Technopark Association. However, the majority of the occupants are small companies and start-ups. Around 40% of these infrastructure: The MSU Science Park is built over companies were formed during the last 3 years, with an area of around 1 hectare that houses eight 2 around 60% of occupants focusing on IT services storied buildings of 5400 sq. ft. each and one 4 and software development. The remaining occupants storied building of 80,000 sq. ft. The individual are focused on telecommunication, biotechnology, office spaces vary from 100 sq. ft. to 5,400 sq. ft. electronics, ecology and new materials. The ag- 70% of the space is categorized as "Class B" office gregate turnover of occupants was around USD$130 space and the balance as "Class C" office space. The million in 2005. In addition to the companies rentals for Class B and C office space is USD$33 present in the MSU Science park, the park manage- and USD$23 per square ft. per year respectively, ment supports around 60 start-ups operating from which is lower than average space rentals of similar MSU itself. space in Moscow. In Moscow, the average rentals for Class A and Class B office space is around USD$66 Linkage: Being located adjacent to MSU, the and USD$42 per square ft. per year respectively. companies have strong linkages with the university. (Source: Russian real Estate: Market Overview, International Good Practice for Establishment of Sustainable IT Parks September 2006, Cushman and Wakefield). MSU also has a large parking space which can accom- Figure 39. Location Map of MSU modate around 90 cars, plus smaller parking areas Science Park near every building. The communication system in the park is of high quality. The occupants use high-speed Internet facili- ties with a bandwidth of 1 Gbps. The park also has a conference-hall for 150 persons and 2 negotiation rooms. The park management provides telecommunication services, round the clock security services, parking facilities, park maintenance services and secretarial services. The park is situated in a prime location of Moscow and is able to leverage the existing urban & social infrastructure of the city. The location map of the park is presented in Figure 39. People: Around 2,500 people are deployed in the park, with most of them being graduates, under- Source : Moscow Science Park ­ http://www.sciencepark.ru graduates, graduate students and professors of Moscow State University. While the average salary in Russia for mid-level IT professionals ranges between USD$16,000 to $20,000, many graduate or post graduate students in MSU are paid around significant part of the resource requirements have USD$6000­$7000 per annum. been met through global venture capital/private equity funds whereas China has tended to fall back 5.2.5 Assessment of Critical Business on dedicated local government-administered funds. and Policy Enablers The scenario for IT Parks has been a bit different, It has been observed that most of the countries that with the developers for these parks depending on have emerged as global leaders in the IT sector have loans from banks & financial institutions for been able to leverage some key business enablers that funding a significant part of their investment, with have enabled their IT companies to thrive in the the assets(buildings, infrastructure, etc.) being global marketplace. Additionally, the governments created serving as collateral. For both categories of of many of these countries have consistently companies i.e. IT companies as well as IT Park supported the development of the sector through a developers, the stock market has served as an set of fiscal, innovation, people and investment important source of finance once they have been climate policies. The current section details our able to achieve critical mass. assessment of some of the critical business and policy enablers which are impacting/are likely to In Russia, the venture capital/private equity sector is impact the development of the IT sector in Russia. dominated by local investors, despite some global investors like the Carlyle Group having attempted to 5.2.5.1 Sources of capital set up operations. Consequently, Russian IT compa- With most IT companies not having asset intensive nies are not able to leverage the international operations thereby limiting their ability to raise relationship networks of these global funds for further debt, angel investment, venture capital/private development. The Russian Private Equity & Venture equity funding has played a key role in meeting the Capital Association (RVCA) estimates that there are investment and growth requirements of these currently over 60 private equity funds in the country, companies. The models have however been different with an average fund size of USD$100 mn. The for individual countries. For example, in India, a leading institutional fund managers include Alfa Country Case Studies 97 Capital Partners, Baring Vostok Capital Partners, sector include local companies like the Stone Group, Delta Private Equity Partners and Siguler Guff's Legend Group, BD Founder Group, together with Russia Partners. It is estimated that a total of global companies like IBM and Microsoft. USD$221 million of venture capital/private equity investments were made in Russia during 2004, with While Russia too has been able to attract a number of the key sectors being IT (27%), retail (26%), telecom- global IT players like Intel, Sun Microsystems and munication (11%), financial services (11%) and Cadence, their focus has primarily been on high end energy (5%). However, the focus on the IT sector is work. Their impact on other segments of the IT somewhat recent, with only 8% of the total venture sector such as IT services and system integration capital/private equity investment of USD$2.6 billion which offer much larger opportunities for employ- over the last 10 years having gone into the sector. In ment generation and scaling up, has been limited. 2004, only 4% of venture capital/private equity deals These segments have been dominated by Russian represented seed level investments, with another 13% companies like IBS and TechnoServe. Large global being early stage investments, 73% expansion stage players in areas such as application development and and another 5% being later stage investments. maintenance and packaged software implementation including IBM, Microsoft, and Accenture, currently With the Russian capital markets being at a nascent do not have large development centers in the country. stage (there are only three listings on the Russian With offshore revenues also being limited, the Trading System in 2005 with no additional resources average deployment level even in the larger Russian having been raised), there is a dearth of exit opportu- IT companies is therefore much lower at around nities, with 40 exits taking place during 2004, which 2,000 people, as against 50,000 in countries like represents 60% of the total number of exits during India. One of the possible reasons for these multina- the last 10 years. With illiquid stock markets, trade tional IT companies not setting up development sales and management buy-outs accounted for 90% operations in the country is the limited integration of the exits. Recently, the Ministry of Economic between global and Russian practices in the areas of Development and Trade has initiated the setting up finance and accounting, legal and taxation, human of the Russian Venture Capital Company, with a resources, etc., which has led to the dominance by corpus of USD$0.5 billion. The company will in local application developers like Parus, Galactica and turn set up smaller venture capital funds with Diasoft. However, the market trends seem to be corpuses ranging from USD$22 million­$55 changing, with global application vendors such as million, with 51 % of the corpus of each fund SAP and Oracle gradually making headway in sectors expected to be contributed by private investors. including oil & gas, retail, and metals & mining. The growth in the IT services sector in a number of other There are well-organized banking sectors dominated countries like India and China were driven by the by state-owned banks like Sberbank, which provide entry of such players, which also led to their global long-term (till 20 years maturity) loans for property system integration partners like Accenture and IBM development at interest rates of 10%­12% per setting up operations in the country. annum. In the recent past, a number of foreign banks like Citibank and ICICI Bank have com- 5.2.5.3 infrastructure menced operations in the country thereby increasing As has been indicated, much of the development in the level of competition. the IT sector has been in and around the three cities of Moscow, St. Petersburg and Novosibirsk. 5.2.5.2 Anchor investors Consequently, IT companies have been able to lever- In most countries that have performed well in the age the existing connectivity, urban and social IT sector, the growth has been contributed partly by infrastructure in these cities. We understand that domestic companies that have started small and although around 5.4 mn sq. ft. of office space is large established anchor investors seeking to expand getting constructed annually in Moscow, annual to newer geographies to increase their competitive- rent ranges between USD$43 to USD$62 per sq. ft. ness. Thus, in India, the growth has been led by and there is also a shortage in availability of office both Indian multinationals like Infosys, Wipro, TCS space. The situation in St. Petersburg and as well as global leaders like IBM, GE, SAP and Novosibirsk is somewhat better. The government is Oracle. In China too, prominent players in the also planning to augment the existing road network 8 International Good Practice for Establishment of Sustainable IT Parks across major cities through public private partner- cant growth and offer relatively higher remuneration ships. There are a number of prominent private (source: Rosstat, 2005). groups like Sistema Hals, Leeds Property and ALM Development involved in developing real estate With both the captive development centers of large infrastructure, including commercial and residential global companies as well as large domestic compa- real estate. A number of private companies are in the nies focusing on candidates with higher qualifica- process of setting up IT parks, including local tions, an increase in off-take of other graduates companies like Value Tech, RosEvro Development (other than in Mathematics, Physics and and foreign companies like Technopolis. Engineering) is expected to have a positive socio- economic impact. Interactions with various The telecommunication sector in Russia is one of stakeholders in the IT sector also reveals the the most dynamic, with significant foreign direct following key human resources characteristics investments having come in. Key service providers which have important implications for the current include Svyazinvest, Transtelecom, Rostelecom in study: basic telephony and MTS, Vympelcom and Megaphone in mobile services. Value added services Preference of most employable resources to in data transmission are provided by firms like locate themselves in the larger cities, RTKomm.RU, Transtelecom, Golden Telecom and namely,Moscow, St. Petersburg and Novosibirsk MTU-Intel. As can be seen from Figure 38, internet or their hometowns. bandwidth costs in Russia are higher than India but Relatively low attrition rate ranging between almost equal to China. The extent of Internet usage 10% to 15%. also appears to be quite limited. Need to augment academic knowledge with business related knowledge, e.g., sector trends. 5.2.5.4 Human resources With the top 100 IT companies employing around While average salaries in the Russian IT sector for 50,000 people in 2005 (source: cNews Analytics, mid-level professionals (please refer Figure 41 for 2006), the total manpower deployment in Russia's details) are almost double that of countries like IT sector is estimated at less than 100,000. With an India and China, they are significantly lower than estimated annual throughout of over 200,000 other near-shore destinations like Canada and employable people (please refer Figure 40 for Ireland. details), there appears to be significant scope for expanding the employment in this sector. However, we understand that there is stiff competition for graduates in Mathematics, Physics and Engineering from sectors/activities like research & development, oil & gas, petroleum, electricity, transport, telecom- Figure 41. Comparative IT Salaries munications, most of which are witnessing signifi- South Africa 36696 Hungary 25174 Brazil 15935 Canada 43841 Czeck Republic 22500 Figure 40.Throughput Russia 21018 Singapore 41512 Malaysia 21823 yearly throughput 2003 2004 China 10095 It engineering graduates 42,138 45,994 India 9896 Mathematics and Physics graduates 21,577 22,132 Thailand 11340 non-It engineering graduates 69,072 76,435 Philippines 12522 (capable of entering It sector) Vietnam 6131 number of other graduates 70,631 81,270 (capable of entering It sector) 0 10000 20000 30000 40000 50000 total 203,418 225,831 Source: auriga research Source : neoIT ­ Offshore and Nearshore ITO/BPO Salary Report 2006. Country Case Studies 99 5.2.6 Corporate Governance and In addition to policies for facilitating development of the IT sector, case studies of successful countries Management Issues like Singapore, China and India have also demon- In most of the countries assessed as part of the study, strated the importance of having efficient imple- effective corporate governance has been observed to mentation mechanisms. There appears to be be one of the consistent hallmarks of well perform- significant scope for improvement on this front as ing economies, including the IT sector. far as Russia is concerned. Some of the representa- Consequently, almost all the large global IT tive areas that present opportunities for streamlining companies, including those in developing economies practices have been highlighted below. like China and India, follow global accounting and reporting principles, are listed on both local and The climate for business, innovation and global stock exchanges thereby having to comply investment is considered weak owing to excessive with mandatory corporate governance principles, bureaucracy. For example, the process of visa have financing partners in the form of global issuance and immigration checks even for investment banks, venture capital/private equity business related visits by professionals appears funds who are usually represented on the company's complicated and time consuming, with there Board of Directors and are run by professional being limited scope for preferential treatment. management teams. However, in Russia, the This is corroborated by Russia's ranking in situation is a bit different. Most of the larger numerous country level surveys like the World domestic IT companies are part of private groups, Economic Forum, Growth Competitiveness unlisted and hence not subject to the scrutiny of Ranking (2004) and Heritage Foundation/Wall external shareholders. Street Journal Index of Economic Freedom (2004). The financial, accounting, and performance report- Absence of formal practices for customs ing practices followed by many of these companies clearance of software, with renegotiations are also reportedly non-transparent, designed with required at the time of every transaction the primary objective of minimizing statutory (Source: Russia and Information Revolution, payments like social security and other taxes. In RAND, 2005). addition to the Russian Trading System (RTS) Although Russia has a Copyright Protection Act lacking requisite depth and participation of global that covers IT software, enforcement needs to financial institutions, linkages with the global be strengthened with almost 90% of all financial services sector are also weak. It is estimated packaged software used in Russia estimated to that there have been only five initial public offers of be pirated. Russian companies on the London Stock Exchange, Despite significant budgets for e-Governance with none of these companies being from the IT programs like Electronic Russia, it is under- sector. As has been indicated earlier, the presence of stood that actual expenditure was around 20% global venture capital/private equity funds has also of the budgeted amount during 2002­2004 been negligible, thereby limiting opportunities for (Source: Russia and Information Revolution, sharing of good practice in business understanding RAND, 2005). It has been observed in other & development, corporate governance and perfor- countries like India that government spending mance reporting. on e-enablement of public services largely benefits local IT firms as most governments give 5.2.7 Government Policies and preference to domestic organizations at the time Implementation Mechanisms of contracting. Such government spending We understand that till very recently, the policy typically boosts SME segment with bulk of the regime in Russia did not have any specific provisions e-governance projects being implemented by for the development of the IT sector. However, the them. Given the long term nature of these government has recently incorporated specific projects which includes software development, provisions for the IT sector in the area of fiscal and implementation and maintenance, these other policies. A high level assessment of the projects have a major role in development of applicable policies has been presented in Figure 42 the local IT services industry. on the next page. 100 International Good Practice for Establishment of Sustainable IT Parks Figure 42. Existing Government Policy Instruments broad classification illustrative interventions Fiscal Policies Software companies having substantial export income and employing minimum 50 employees enjoy lower unified social tax rate of 26% against the normal rate of 35.6% on employee salary cost [Source: article one, Item 15, Federal law no. 144- FZ]. Computer equipment acquired by an organization involved in It activities are allowed full depreciation in the course of one year [Source: article one, Item 6, Federal law no. 144-FZ]. It companies located in Special economic Zones (SeZ) enjoy fiscal benefits like lower unified social tax rate of 14% [Source: Item 7, article one, Federal law no. 117-FZ and article 241, Part one no. 146-FZ] , 5 year exemption on property tax (normal rate 2.2%) [Source: Item 12, article one, Federal law no. 117-FZ and article 381, Part one no. 146-FZ]. additionally, these companies also benefit from importing goods without payment of customs duty (normal rates range from 5% to 20%) and value added tax (normal rate 18%) while exports from SeZ are exempt from export duty (normal rate 6.5%) [Source: article 37, Chapter 8, Federal law no. 116-FZ]. local governments provide additional incentives to It companies. For example, St Petersburg allows It companies that have invested more than USd$1.8 million in the city to enjoy a reduced profit tax rate of 20% (normal rate 24%) and companies whose investment in the city exceeds USd$5.6 million additionally enjoy 50% concession on property tax [Source: russian It Quarterly, october 2006]. Innovation Policies grants received from specified technological development funds/innovation funds like russian fund of techno- logical development, Fund for the Production of Innovations are not considered as income for the purpose of computing profit tax [Source: article 251 Part one no. 146-FZ]. research & development (r& d) expenses incurred by organizations are considered as allowable expenses while computing profit tax irrespective of whether r&d projects are successful or not [Source: article 262, Part one no. 146-FZ]. Computer programs, including source code, object code and databases enjoy copyright protection during the lifetime of the author and 50 years beyond [Source: articles 3 and 6, no. 3523-1 with changes and amend- ments introduced by the Federal law no. 177-Fl]. the implementation authority for copyright protection is the Federal executive authority on Intellectual Property. Specific laws on legal protection of the topologies of integrated circuits are in place with an exclusive right of the creator to exploit a protected topology for 10 years [Source: article 10, no. 3526-1 with changes and amendments introduced by the Federal law no.82-Fl]. Under the e-russia program government facilitates transfer of existing technologies from government/defense institutions to private institutions engaged in research & development activities, with the private institutions hav- ing the right to retain intellectual property rights to new products developed an exclusive right to a computer program or database created in connection with service relations on a state contract for federal needs or needs of a subject of the russian Federation, shall belong to an executor (contrac- tor) unless otherwise provided by a State contract that this right shall belong to the russian Federation or a subject of the russian Federation, represented by a State customer [Source: article 12, law no. 3523-1 with changes and amendments introduced by the Federal law no. 177-Fl]. Human Capital there do not appear to be any specific policies for aligning university curriculum to the requirements of the It Policies sector. a number of labor practices like seeking an employee's written consent prior to redeployment/relocation within the same organization restrict operational flexibilities [Source: article 72, Chapter 12, Federal law no. 197-FZ]. Investment Climate government is supporting development of It infrastructure through the electronic russia Federal Priority Policies Program, where 33% of the outlay is dedicated to infrastructure development across the country including construction of high-speed internet backbones and peripheral links. Internet penetration across the country mandated by 2003 law on Communications which states that all towns with a population in excess of 500 to have internet access point [Source: article 57, Chapter 8, Federal law on Communications adopted by the State duma on June 18, 2003]. double taxation avoidance treaty with over 60 countries including USa, UK, Japan, germany, France, Bel- gium, Bulgaria, Hungary, denmark, Spain and Sweden. [Source: Point 3, decision of the government of the russian Federation no. 1605 and Website: http://www.nalog.ru/doceng.php?id=7220&topic=eng_sotrud- nich ]. no restriction on foreign direct investment in the It sector. Foreign investments in excess of USd$37 million or projects with foreign stake exceeding USd$4 million categorized as "priority investment projects" and enjoy exemption from customs duty on imports [Source: article 16, Federal law no. 160-FZ]. Federal law on Foreign Investments in the russian Federation guarantees protection from changes in federal laws which may adversely impact the organization for a maximum period of 7 years like increased rates on specified taxes [Source: article 9, Federal law no. 160-FZ]. Country Case Studies 101 5.2.8 Potential Growth Opportunities The packaged software applications market is also expected to increase at 20% per annum to for the Russian IT Sector reach USD $1.83 billion by 2007. The demand Before attempting to identify specific recommenda- for packaged software is primarily expected from tions for development of the IT sector in Russia, it companies in high growth sectors like oil and is necessary that the current and potential market gas, energy, metals, communication and retail, opportunities available to companies operating in where there is increasing competition leading to this sector are identified. Based on our assessment of efficiency pressures. the sector, the following represent potential op- portunities which can possibly be targeted. export market opportunities IT export revenues are expected to increase to Domestic market opportunities $USD1.75 billion in 2007, translating to a CAGR Unlike many other countries like Malaysia, India, and of 34%. Based on our assessment, significant China, realizations on domestic IT services in Russia opportunities are expected in the following market are currently higher than in IT services exports. There segments. also appears to be significant upside as far as growth in the domestic IT market is concerned, with turnover expected to increase to USD$14.32 billion Leveraging the presence of existing global by 2007 (Source: IDC Blackbook, Euromonitor). In majors in IT and telecommunications like terms of individual market segments: Intel, Sun Microsystems , Cadence Systems, and Samsung for continuing the focus on high- The demand for hardware is expected to increase end development activities in the areas of by a CAGR of 16.7% per annum to around system software development, wireless tech- USD$10.5 billion by 2007, driven by govern- nologies, etc. Given that many of these ment spending and industry demand, with many companies are also global leaders in semicon- of the customers being in the process of acquir- ductors and telecommunication equipment ing their first information systems. Based on our manufacturing, expansion of their activities in assessment of key trends, there appear to be Russia to cover other areas like fabless chip significant opportunities in the semiconductor design for IT, telecommunication equipment industry the near term, driven by increasing over & consumer durables, chip fabrication/foundry demand from IT hardware, telecommunications facilities and semi-conductor packaging, and equipment and the consumer durables sector. assembly and testing services represents a Russia may be well placed to leverage its skilled potential opportunity. manpower to target specific segments in this Given that the salary costs of IT professionals in market including fab less chip design, semi- Russia are almost half that of other countries like conductor packaging, and assembly & testing Canada, Ireland, and lower than countries like over the near term. the Czech Republic and Hungary (please refer IT services, for which the market in 2005 was figure 41) which have successfully positioned estimated at USD$1.39 bn, is expected to grow themselves as near-shore destinations to coun- at around 20% per annum to reach USD$2 tries like US and UK, there appears to be a billion in 2007. With many of the larger significant opportunity for Russia to position companies already having implemented itself in this space. Countries like India have packaged application software such as SAP and emerged as preferred offshore locations leverag- Oracle Applications, the growth in this segment ing lower human resource cost and thus it will is expected to be driven by packaged software be difficult for Russia to compete with them. implementation and system integration The existing competencies of the human requirements of medium-sized firms in sectors resource pool in Russia together with its such as food, retail, and real estate. The leading geographical location & relative cost of man- packaged application vendors like SAP and power are expected to serve as key competitive Oracle are already gearing up to meet this advantages viz. a viz. other countries. demand by launching their small & medium Representative offshore activities which can be enterprise and application service provider targeted include the following: (ASP) versions. 102 International Good Practice for Establishment of Sustainable IT Parks Packaged application implementation and 5.2.9 Identification of Issues and maintenance through a mix of onsite and Growth Strategies offshore services. Having identified the potential growth opportuni- System integration services. ties for the Russian IT sector, it also becomes Software application development for various necessary to identify market participants who are industry verticals leveraging existing tools. well placed to drive growth in the respective areas, IT infrastructure maintenance and support. together with potential strategies for development, Select knowledge process outsourcing based on identified good practice in other countries activities like mathematical and economet- assessed as part of the study. ric modeling for sectors like financial services. 5.2.10 Role of It Parks and Proposed Unlike the high end IT services market proposed to be targeted primarily through captive develop- Business Models ment centers, the employment (and turnover) As has been demonstrated by the case studies, the potential of this segment is expected to be key requirement underlying setting up of sustainable significantly higher, thereby providing domestic IT parks is the ability to attract credible occupants to IT services companies the opportunity to scale the park, with business models which demonstrate up rapidly. sustainable viability. Consequently, having credible Figure 43. IT Sector Growth Segments & Strategies potential growth segments identified issues recommended growth strategies Domestic Market currently dominated Facilitate direct presence of global majors like IBM, Wipro, HP and Hardware by importer-resellers and CISCo. as this will enable positive rub-off on It Services, semiconductors assemblers & high end captive development Focused targeting of global semiconductor players like Intel, texas Instru- ments and Samsung as anchor investors, initially for areas such as design, assembly & testing services. It Services Market currently dominated Facilitate entry/expansion of global It services companies like IBM, by local companies with inad- Microsoft, accenture, Cap gemini, Infosys, Wipro and tCS possibly equate scale of operations through participation in ongoing e-governance program--is expected to lead to positive impact on It sector employment opportunities encourage domestic companies to partner with global companies for sharing of good practice, receiving quality accreditations like SeI CMM. Packaged applications large companies opting for encourage use of established packaged application software to facilitate global packaged applications compliance to good practice in performance management & reporting, applications in finance & offer standardized training platforms to It professionals which can then by accounting, payroll, etc. from leveraged for export markets local software developers Facilitate setting up of development centers by global packaged applica- tion majors like SaP, oracle for country level customizations exports High-end services like existing captive development Proactive government support for expansion of existing development system software, semi- centers primarily an outcome centers of global companies, together with focus on additional high-end conductor fabrication, of initiative by the respective services such as chip design and assembly & testing. packaging, assembly global player (e.g., Intel, Sun two pronged approach comprising a) facilitating entry of global leaders & testing Microsystems.) in the semiconductor industry (like Intel, texas Instruments and St Micro- Semiconductor design, electronics) possibly with an initial focus on design, packaging, assembly fabrication, assembly & test- & testing and b) supporting local companies in r&d for fab less design ing carried out on a limited scale primarily by domestic companies It Services including Primarily carried out by local Facilitate entry of global It services companies with a focus on meeting application develop- companies with inadequate near-shore export opportunities in europe and United States ­ expected ment & maintenance, scale of operations to have positive rub-offs on domestic It services companies and It sector and system integration. employment opportunities. Country Case Studies 103 anchor investors in the park has been identified as an tion of multi-tenant buildings with contempo- essential prerequisite for success both in developed as rary facilities and build to suit options, adequate well as developing countries. In the current section, road & other surface transport connectivity with we have attempted to present our assessment of the the adjoining city, intra-park roads, sewerage and critical business enablers for IT Parks in Russia, electricity. based on the case studies of parks in other countries Lease or sale of land for built-to-suit facilities at as well as ground realities in Russia. rates lower than those prevailing in the adjoining city. The generic critical business enablers which are State of art virtual connectivity in terms of data likely to feature, in the expectations of all categories & voice infrastructure including international of IT companies, have been highlighted below. connectivity. Location of the park in an area which permits it In addition, there are a number of potential value to leverage the existing urban and social drivers which are expected to impact specific types infrastructure of the three key cities, namely, of IT companies, with the level of interest also Moscow, St. Petersburg and Novosibirsk, as expected to vary across different categories of IT availability of the right quality of human players (please refer Figure 44 below for details). resources is expected to be a problem in any other region. One of the probable tenants in the IT Parks are local Simplified policy implementation mechanisms hardware assemblers. As highlighted in figure 44, in terms of single window approval facilities in the key motivating factor for local hardware areas including operating license, sanction of assemblers to be located in IT parks is the incremen- building plans, and tax & customs duty tal fiscal concessions that they might enjoy. Such registrations. so as to cut down significantly on incentives will help these companies increase their the time for setting up new/expansion opera- realizations. However, the primary discouraging tions. factor for such companies to be located in IT parks High quality physical connectivity and infra- is the investment that they have incurred in the structure in terms of air (both international & existing facilities. Moreover, for the local hardware domestic), road and rail connectivity, a combina- assemblers being located in proximity to clients is Figure 44. IT Parks ­ Segment Specific Drivers type of it companies Key value proposition of it parks, if any local hardware as- Motivating factors: Incremental fiscal concessions, if applicable semblers delimiters: existing investments in infrastructure; proximity to clients Motivating factors: reduction of time to market, for new entrants; Fiscal concessions, if applicable; Built to global hardware players, suit options for custom facilities like wafer fabrication plants; need for state of art facilities for facilitating ac- including semiconductor creditation; linkages with centers of excellence for r&d support; lower investments in ancillary infrastructure companies & facilities management delimiters: existing investments in infrastructure for players with existing development centers; proximity to domestic clients local software & It Motivating factors: reduction of time to market for expansions; Fiscal concessions, if applicable; Built to suit services companies options for custom development centers; need for state of art facilities for facilitating accreditation; domestic venture capital/private equity support; lower investments in ancillary infrastructure & facilities management delimiters: existing investments in infrastructure for players with existing development centers; proximity to domestic clients global software & It Motivating factors: reduction of time to market for new entrants/expansions; Fiscal concessions, if ap- services companies plicable; Built to suit options for custom development centers; need for state of art facilities for facilitating accreditation; lower investments in ancillary infrastructure & facilities management delimiters: existing investments in infrastructure for players with existing development centers; proximity to domestic clients 10 International Good Practice for Establishment of Sustainable IT Parks one of the key requirements. If the IT Parks are with plug & play facilities. Moreover, the IT parks located in remote locations, far from the client will provide state of the art facilities which are key location, then it will be difficult for these companies requirements for these companies to secure quality to operate from such locations. accreditations. Additionally, the shared services like conference facilities, shared telecommunication The other segment of IT players which might be infrastructure, parking, eateries and security interested to be located in IT Parks are Global services will enable these companies to lower hardware companies, including semiconductor investments in ancillary infrastructure & facilities companies. Typically the capital investments of such management. Since many of these companies companies are huge and thus the associated risks are would like to move to their own facilities with the higher. One of the key factors which will motivate park on a later date, the parks which offer built to such players is fiscal incentives, since that will help suit facilities for custom development centers will these companies reduce financial risks. Other be preferred. For the small companies, additional specific value proposition that the IT parks can offer motivator will be the park management providing to these companies is providing built-to-suit options support to enable them get access to venture capital for custom facilities like wafer fabrication plants. or private equity. Moreover, these companies need state of art facilities for facilitating accreditation. These companies might However, as in the case of the hardware companies, be motivated to locate in IT Parks if the park the key de-motivators for global as well as local provides such state of the art facilities. Many of software & IT services companies to be located in these companies need strong linkages with R&D IT parks are (a) the investments already made in the institutes or universities for developing new existing facilities and (b) proximity to domestic products. IT Parks which offer such linkages will be clients, in case the IT Park is situated in a remote preferred by such companies. Additionally, another location. important incentive for these companies to get located in IT Parks will be lower investment in The IT Park case studies and primary interactions ancillary infrastructure & service management, with various stakeholders clearly seem to demon- which can be shared with other companies like strate a case for management of the IT Parks to be canteen, parking and conference facilities. Further, vested with private sector players for ensuring for global hardware companies which are new adequate accountability and efficient service. entrants in Russian markets, the key motivating Possibly, as has been the case in many other factor to get located in IT parks is reduction of time countries, existing facility management companies to market the products. Such reduction in time will like C B Richard Ellis and Bovis Lend Lease can be help these companies capture a minimum market considered for this purpose. share in short period of time and thus reach financially sustainability. As regards investments into and ownership of the parks, there seem to be a number of private real However there are a number of de-motivators for estate companies like Sistema Hals, Rosevro these companies to be located in IT Parks. One of Development, Leeds Property and Technopolis with the key de-motivators for global hardware compa- the requisite financial wherewithal for developing nies are the investments already incurred in the such projects. Given that good Practice in other existing facilities. Additionally, if the IT park is countries clearly indicates the need for management located in remote location away from their clients, control of the park development company to vest then such a location might act as a negative catalyst with the private sector for higher efficiency & for the global hardware companies. productivity. Consequently, a facilitation role is recommended for the government other than in The key factors that will motivate the global and situations where the land is owned by it. In such local software & IT service companies to get situations, the government can possibly pick up an located in IT Parks are (a) the fiscal concessions equity stake in the development company, given which will enable them to obtain better realizations that financial returns on IT parks have been fairly and (b) reduction in time to market for expansions attractive. given that the IT parks will provide quality space Country Case Studies 105 5.2.11 Policy Good Practice That can Leveraging the two significant core competencies be Leveraged of Russia (i) expertise & skill base and (ii) the In almost all the countries assessed under this study, comparative lower salary costs as compared to it has been observed that government policies have other near shore countries like Canada & played a pivotal role in development of IT sector. Ireland. The combined effect of these factors The role of government in most countries has also should create a significant opportunity for Russia been observed to evolve over time, with a more to focus on captive R&D centers, semi-conduc- direct role during the initial stages of sector develop- tor assembly and testing services and near shore ment gradually moving to a facilitative role with the IT services for exports. picking up of private sector led growth. Excessive bureaucracy and unclear guidelines in areas such as visa, customs, and taxes shows there The current section of the report highlights policy is scope for the government to streamline policy good practice that can be leveraged, given the implementation mechanisms. existing scenario in Russia, based on the countries Improvements should be made to develop the analyzed as part of the study. For purposes of financial services sector for meeting funding analysis, the good practice have been categorized requirements of companies as well as improving into i) policies for developing the IT sector in the levels of corporate governance and global country and ii) policy good practice for develop- linkages. ment of IT Parks. Figures 45 and 46 below outline relevant policy good practice for facilitating Countries that are emerging as global leaders in the development of the IT Sector and IT Parks respec- IT sector have consistently supported the develop- tively. As has been assessed during the study, IT Park ment of the sector with fiscal, innovation, human occupants are offered a set of additional benefits capital and investment climate policies. These areas over and above those available to IT companies not form the basis for Policy Good Practice as adopted operating out of IT Parks. Consequently, the policy by the other countries analyzed in this study. good practice highlighted for IT sector development Further, such policies can be segregated as (i) would also be applicable to IT Park occupants, other policies for developing IT sectors and (ii) specific than in cases where additional concessions have been policies for developing IT Parks. envisaged in a specific area. Fiscal Incentives as identified from the good The measures outlined below only represent good practice study which Russia can adopt include practice adopted by other countries covered as rationalizing customs duty as well as consolidat- part of the study. Consequently, these can at best ing export/import duties and simplifying proce- be treated as starting points and additional dures should help attract global hardware analysis would be required for assessing their companies. Additional Fiscal incentives include budgetary & other impact for customizing these providing tax breaks as well as more specific to meet the requirements of Russia, should the incentives related to customs duties have been government decide to consider any of these for mentioned in Figure 45. These are policies which implementation. can be implemented in the short term with the immediate benefits being available to prospective Following the analysis of the Russian IT sector in investors. the previous sub-sections 5.2.1 to 5.2.7, the key issues as summarized in Figure 45, are: Innovation policies, which have been identified from benchmarking other countries for IT sector Russia is well placed to attract more global IT development, include providing tax breaks to players, focusing on segments such as IT encourage investment in Research and services and system integration. Therefore, it is Development (R&D) as highlighted in Figure 45. necessary to encourage direct presence as well Although, there have been recent amendments to as expansion of large global hardware and IT many of the copyright related legislation in services companies including semi-conductor Russia, the enforcement of such legislations need companies to improve average scale of opera- to be strengthened. Such strengthening could be tions. through the creation of a dedicated tribunal on 10 International Good Practice for Establishment of Sustainable IT Parks Figure 45. Policy Good Practice for IT Sector Development Key issues/recommended policy Good practice Strategies for russia which can be considered encourage direct Fiscal incentives presence as well as rationalizing customs duty on hardware viz. a viz. components, with simplification of import proce- expansion of large dures for attracting global hardware companies. global hardware Providing tax breaks like exemption from export taxes for an initial period of 5 years for facilitating & It services com- increase in exports. panies, including Providing specific fiscal incentives to semi-conductor companies like: semi- conductor ­ exempting raw materials, equipment imported for fabrication, assembly & testing from customs companies to duty. improve average ­ rationalization of Vat on all semi-conductor products to a lower percentage. scale of operations ­ allowing accelerated depreciation rate for profit tax purposes (up to two times higher than the standard statutory rates). Focus on captive r&d centers, semi- innovation policies conductor assembly Providing tax breaks to encourage investments in research & development such as and testing services ­ 100% exemptions on customs duty for equipment and goods imported for research & development and near shore It purpose. services for exports ­ 100% income tax deduction on capital expenditure with respect to scientific research. ­ any amount exceeding a certain percentage of Vat paid on sale of software products to be Streamline policy refunded provided it is used for r&d purposes. implementation Strengthening enforcement of copyright & patent legislations through creation of a dedicated tribunal mechanisms for dealing with disputes on copyright & patent related issues. encouraging quality accreditations like CMM5 and BS7799 by providing incentives or grants for re- development of imbursing a part of the expenditure incurred for obtaining such quality certificates or for filing patents. financial services sector for meeting Human resource policies funding require- encouraging development of management & business aptitude in engineering & other students through ments of companies establishment of finishing schools. these schools could be structured as public-private partnerships, as well as improv- with infrastructure being provided by government (in case of inadequate private interest) and course ing levels of corpo- development & faculty being provided by companies in the It sector. rate governance developing english language proficiency of the human resource pool through policy interventions like and global linkages introducing compulsory english education from primary level. Setting up Committees comprising both government officials and It industry representatives for assess- ing requirements for changes to existing curriculum. Simplifying visa & associated regulations for It professionals from other countries traveling on business- related purposes. Strengthening training infrastructure for meeting It sector manpower requirements through partnerships with global It training companies. investment climate Implementing a single window mechanism for providing all benefits, concessions & permits to It companies. this would require a single agency within government to be identified as the nodal agency, with a presence in all key cities, which would then process applications seamlessly in coordination with other Ministries. Consolidating the existing policies applicable to It companies, together with implementation mecha- nisms, and communicating them in a transparent manner to existing & potential It sector investors. Possible options include online publishing on the Minsvyaz website with links from websites of industry associations like russoft and ankit. necessary processes for regular updating of these policies would also be required. extending all the above concessions to local companies, subject to completion of listing on rtS within a pre-defined period and extending additional fiscal benefits on successful listing on international stock exchanges. Formulating policies for attracting global venture capital and private equity funds like exemption of tax on income from investments and allowing losses to be deducted from other taxable income. deepening existing capital markets through measures such as demutualization and attracting large global financial institutions and investment banks. copyright & patent related issues and encouraging Changes in human resource policies that will benefit acquiring quality accreditations by linking fiscal development of the IT sector fall under three main incentives to them as mentioned in figure 45. categories--education, immigration and labor Laws. Country Case Studies 107 Figure 46. Policy Good Practice for IT Park Development Key issues/recommended policy Good practice Strategies for russia which can be considered global It companies primarily Fiscal incentives in It Services are expected to Providing fiscal incentives to potential It Park occupants, which are at least at par with the exist- constitute a key target segment ing incentives available to It companies located in Special economic Zones (Policy reference on account of reduced time to nos. 116-FZ, 117-FZ, 144-FZ, etc.), to ensure adequate attractiveness of It Parks. market through availability of Providing land owned by government for development and to It Park occupants at subsidized ready infrastructure, potential rates, depending on level of employment generation. fiscal incentives & commercial Supporting It Park developers by subsidizing rentals for plug & play infrastructure and land benefits, need for state of art lease rates for an initial period (say 3 years), so that a part of these subsidies can be passed on infrastructure & connectivity and to potential occupants, thereby creating a differentiation viz. a viz. normal office/commercial simplified policy implementation infrastructure. mechanisms, if available innovation policies large domestic It services com- Provide incubation facilities & space with world class plug & play infrastructure within the techno panies facing growth pressures parks to start-ups and small & mid-sized It companies at subsidized rentals for the initial period and with a focus on exports are also likely to consider It Parks investment climate for their future expansions with Permitting mixed land use in It Parks by earmarking a proportion of the total land for commercial the drivers being identical to use (say 70 %) and residential use(say 30 %), thereby improving project viability. global It companies Implementing a single window mechanism for fiscal concessions & benefits, as well as all required statutory approvals, with a physical presence in the Park. given the existence of large extending all the above concessions to local companies, subject to completion of listing on real estate companies and rtS within a pre-defined period and extending additional fiscal benefits on successful listing on promotion of private sector It international stock exchanges. Parks, it may be possible to extending special concessions to all financial entities like banks, financial institutions, venture attract private developers for It capital & private equity funds located in the It Park. representative concessions/benefits include Park development exemption of tax on income on such units for a initial period (say 5 years). In terms of education, the development of English providing assistance to existing & potential IT competencies and management and aptitude skills are sector investors for obtaining necessary clearances/ of utmost importance. Policy changes addressing the approvals for commencing/expanding operations in skills levels in these areas are detailed in Figure 45. the country. Immigration procedures for obtaining visa permits In order to improve corporate governance and into Russia are confusing to foreigners and pose an transparency in local companies, measures could be obstacle to the development of the sector. Simplifi- taken to extend all concessions to local companies cation of visa & associated regulations for IT which complete their listing on RTS within a pre- professionals traveling on business-related purposes defined period and extending additional fiscal are recommended. The one-stop-shop run by the benefits on successful listing on international stock Jordan Investment Board (JIB), which has simplified exchanges. Further measures, which would support procedures for issuing visas and residency approvals the Investment Climate of Russia regarding capital for foreign investors and professionals, is an example markets, have been stated in Figure 45. of such simplification. In figure 46, we present the Policy Good Practice Implementing a single window mechanism for that can be adopted for developing the IT parks in providing all benefits, concessions & permits to IT Russia. companies, would be a key measure for improving the Investment Climate for the sector. The process Based on our assessment the following categories and benefits of this single agency have been have been identified as likely occupants for IT Parks: highlighted in Figure 45. It is intended that a designated nodal agency with adequate empower- Global IT companies primarily engaged in IT ment be the single point of contact for communica- services tions relating to existing policies & regulations and Large domestic IT services companies 108 International Good Practice for Establishment of Sustainable IT Parks Based on case studies on IT Parks in various of Single window mechanisms applicable for both countries, it is recommended that private sector real estate players and IT companies & other developers be involved in promoting the IT Parks in occupants. It is felt that such a nodal agency would the country. simplify investment and rental/leasing procedures in IT Parks thus improving the investment climate. The policies listed below have been identified as being key to promote investment/involvement in As mentioned under the strategy for IT sector development of IT Parks in Russia. development, all of the above concessions should be extended to local companies as well, subject to Currently, a number of Fiscal Incentives are available completion of listing on RTS within a specified to residents of Special Economic Zones, including a timeframe. Additional fiscal benefits can be offered five-year exemption on the assets of organizations on successful listing in international stock exchanges. and land tax and decreased rates of Unified Social This provides an effective system of corporate Tax. Extending similar benefits to occupants of IT governance and management, essential to a well Parks will be a key consideration for IT Companies performing economy as it provides an assurance for on deciding to relocate/locate to IT Parks. Further potential investors and ensures sustainability of the incentives concerning subsidized land rates and sector. rentals have been highlighted in Figure 46. However, it is important to note that all such incentives should be applicable for a specific time- frame and should possibly be linked to minimum . Country Case Study: employment generation & investment stipulations. Jordan Successful Innovation Policies for IT Parks include 5.3.1 IT Sector: Contribution to GDP providing business incubation services to start-up The Jordanian economy is estimated to have grown companies, including initiating contact with venture at an average rate of 6.1% during the period from capitalists similar to those offered by Singapore 1996 to 2003 (Source: Department of Statistics, Science Park. Similar policies in the Russian context Jordan). The growth in the economy has been have been highlighted in Figure 46. fuelled primarily by sectors like finance and banking (around 18% of GDP in 2003) manufacturing Permitting mixed land use like commercial and (15%) and trading (9%). residential in addition to core IT office space/ facilities in IT Parks is one of the investment climate The services sectors accounted for around 49% of policies which would stimulate IT Park develop- GDP in 2003, with the IT sector contributing ment given that return on investments from USD$295 million, or 2.9% of GDP. While this is ancillary facilities like residences, retail & entertain- significantly lower than countries like China and ment are usually higher than returns on core IT Park India where the sector contributes 4%­5% of GDP, facilities. Developers of Hitec City, Hyderabad and the IT sector in Jordan has shown significant growth CFZ, Malaysia, are in fact mandated to develop during the period from 2001 to 2004, with a CAGR such parks having designated zones for housing and of 37% during this period (please refer Figure 47 commercial end use which have increased the below). returns on investments in developing the IT park as compared to the returns from a standalone IT Park. 5.3.2 IT Sector: Growth, Composition Similar mixed land use policies may be adopted and Trends while developing Russian IT Parks as an incentive Compared to other developing countries Jordan has for private sector participation in development of IT been a late starter in developing its IT sector. The IT Parks in the country. industry in Jordan, though active since early 1990s, came into the fore only after the Regulatory Other stimulators for providing investment climate Framework, Estate, Advancement Programs, for development of IT Parks include special financial Capital, Human Resource Development (REACH) concessions for Russian IT Park residents, which have Initiative was launched by the government in 1999. been highlighted in Figure 46, along with the concept However, the country is considered to be one of the Country Case Studies 109 Figure 47. GDP and IT Sector Figure 48. Composition of the Jordanian IT Sector 120 3.0% 2.91% 500 90 2.5% 79 2.39% 400 CAGR 37% 361 60 2.0% 300 1.89% 70 30 1.5% 200 40 226 40 188 100 130 0 1.0% 2001 2002 2003 0 GDP (Market Price) IT Sector share of GDP 2001 2002 2003 2004 Exports Domestic Source : Department of Statistics, Jordan Source : Int@j pioneers in the Middle East Region as far as development of IT sector is considered. Microsoft and Oracle and system integration. Almost 15% of IT services revenues are gener- The REACH Initiative was started with the mandate ated from service delivery centers like technical of transforming Jordan into a regional leader and a assistance centers and call centers. global exporter of IT products and services. It was a Software solutions like packaged software 5 year iterative plan which set targets of creating development, system development and web 30,000 IT-related jobs, generating annual export design account for nearly 37% of the sector revenues of USD$550 million and attracting revenues. However nearly 15% of software USD$150 million of Foreign Direct Investments by solutions revenues are generated from resale of off 2004 in the IT sector. the shelf packaged application solutions offered by global companies like Microsoft and Oracle. While none of the targets set under REACH could IT hardware which contributed USD$71 be met, the industry generated total revenues of million to the overall sector revenues, accounted USD$440 million in 2004 as compared to for around 16%. However, the entire hardware USD$170 million in 2001 and recorded a Compounded Annual Growth Rate (CAGR) of 37% in revenues during this period. Key constitu- ents of Jordan's IT sector have been discussed below Figure 49. Composition of Revenues (please refer Figure 48 below for details). (2004) IT services with a turnover of USD$204 million during 2004 accounted for nearly 46% of the sector revenues. IT consulting, training, Hardware 64 7 application support services and network solutions are the major revenue earners for the Software 123 39 industry with as much as 72% of the IT services turnover contributed by these services. However, none of the large global IT companies are IT Services 123 33 currently present in Jordan. Domestic majors like the Ideal Group, Integrated Technology 0 100 200 300 USD Mn Group and Estarta solutions earn a significant proportion of theirrevenues from implementing Exports Domestic packaged applications solutions offered by 110 International Good Practice for Establishment of Sustainable IT Parks As on 2006, all IT companies present in Jordan were Figure 50. Revenues by Industry located in and around the capital city of Amman. Sectors (2004) 5.3.3 IT Exports Although export revenues have increased at a CAGR Others of 26% from USD$40 million in 2001 to USD$80 34% million in 2004, exports accounted for only 20% of the overall sector revenues (please refer Figure 51 for Government 19% details). Some key trends in the exports market have been highlighted below. Key export destinations include other Gulf Finance & Banking countries, which account for nearly 70% of total Manufacturing 3% 15% exports with Saudi Arabia being the largest market followed by UAE and Iraq. Other export Telecommunications 14% destinations include USA, UK. Germany and Trading North African countries like Egypt, Morocco 15% and Yemen. Source : Int@j In terms of industry verticals, Banking & Financial Services (32 % of total export rev- enues) Telecommunications (15%) and Public Sector/Government (13%) accounted for around 60% of total exports in 2004. revenues is from trading or reselling as the Out of the total export revenues of USD$80 country does not have any manufacturing or million in 2004, nearly 49% is accounted by IT assembly operations. services and 42% by software solutions. In the domestic market, the government acts as the 5.3.4 Past Government Initiatives for largest client for the industry accounting for nearly 20% of overall domestic revenues. Government Development of the IT Sector spending on education, healthcare and the e- As has been indicated earlier, the IT sector in Jordan Governance program offer a large market for the gained momentum during the late nineties after the local players. Other industry sectors which act as major markets for the industry include financial services and telecom. Figure 52. Exports by Destination (2004) Others Figure 51. IT Exports 28% Saudi Arabia 24% 90 80 79.4 69.7 Bahrain 70 4% UAE 60 50 15% 40 40 40 30 Syria Iraq 20 5% 9% 10 UK 0 7% USA 2001 2002 2003 2004 8% Source : Int@j Source : Int@j Country Case Studies 111 REACH initiative was launched by the government. The Hashemite University Technology Park was Consequently, Jordan's key ICT indicators are not planned to be developed as a joint venture between comparable with countries like Singapore, India & the Hashemite University and Hillwood, a USA- China (please refer Figure 53 below for details). Even based real estate company. However, as on date, the though the voice based communication infrastruc- park is yet to commence operations. ture has improved significantly with liberalization of the telecommunication sector in 2000, the infra- As an outcome of the REACH Initiative, in April structure for data communication has not developed 2002, the government created the Ministry of in a uniform manner throughout the country. As a Information and Communication Technology result the government had, in the past attempted to (MoICT) by restructuring the Ministry of Post and develop IT parks in Jordan to provide an impetus to Communication with the mandate of articulating the IT industry in the country. policies for information technology and telecom- munication. In September 2003 the MoICT Under the REACH initiative, it was resolved that promulgated the first comprehensive ICT policy of three IT parks would be developed in different Jordan, Statement of Government Policy on the parts of Jordan to improve the infrastructure Information & Communication Technology Sectors available to the IT industry. These IT parks were to and Postal Sectors and The National Strategic Plan, be developed within 2003 following different 2004­2007 on the Information & Communication public private partnership models with the private Technology Sectors and Postal Sectors. sector bringing in investments and the government providing the necessary policy support. However The Jordan Education Initiative (JEI) was launched despite attempts, Jordan currently does not have by the government in June 2003 to support educa- any operational IT parks. tional reforms in Jordan bridging the gap between the curriculum in local universities and the require- Some past initiatives include CyberCity in Irbid and ments of the IT industry. Under this program the the Hashemite University Technology Park in Zarqa. government is building a nationwide high speed Even though CyberCity was commissioned by end broadband network connecting schools, colleges and 2001, till date it does not house any IT companies. universities. Figure 53. Key ICT Indicators for Jordan Saudi parameters Arabia uAe china india turkey Kuwait Jordan Singapore Social indicators total Population (millions) 23 4 1296 1080 72 2 15 4 Urban Population (%of total population) 88 85 40 29 67 96 79 100 ict Sector indicators Access: telephone lines (per 1000) 159 277 241 43 267 202 117 430 Internet users (per 1000) 95 397 73 23 78 237 86 559 Personal computers (per 1000) 137 117 40 11 45 122 55 565 Mobile Subscriber (per 1000) 395 860 258 48 494 855 272 891 Population covered by mobile 99 99 73 41 68 99 99 100 telephony (%) Quality: Broadband subscribers (per 1000) 0.4 13.1 16.5 0.6 0.8 5.4 0.9 118.2 International Internet Bandwidth 56 543 57 4 40 120 29 5699 (bits/person) Affordability: Price basket for fixed line (US$/month) 11.7 5.0 3.6 3.2 10.3 10.3 10 6.7 Price basket for mobile (US$/month) 9.6 3.5 3.7 3.2 6.4 7.4 9.4 5.7 Price basket for internet (US$/month) 34.7 13.1 10.1 8.7 19.8 24.7 26.3 11 ICt expenditure (% of gdP) 2.5 -- 5.3 3.7 7.3 1.7 8.7 10.4 Source: World Bank, UndP, ItU and others. 112 International Good Practice for Establishment of Sustainable IT Parks In the course of our interactions with policymakers investment company named Al Bountain and industry associations it has emerged that the Investment Group, Arab Land Investment Ltd, government is planning to develop another IT park Prosper World Group Ltd and two individual in Jordan. This park would be located in the investors. JUST holds 33% shares of the company outskirts of Amman and would be developed under with the balance being equally shared amongst the a public private partnership model with the other investors. In this project, JUST was respon- government providing land at subsidized rates while sible for providing the land with the private sector a private sector real estate company would develop investors responsible for the construction of the park the facilities and market the space. The government and marketing the facilities. is considering offering fiscal incentives like tax breaks to IT companies locating in the park. The park is spread over an area of 4 sq kms. The However, no additional details are available at this park is now in its first phase utilizing only one point of time. fourth of the total area. Around 36,000 sq meters of space is built up as industrial, residen- 5.3.4.1 it parks in Jordan tial and commercial facilities. One of the key action points identified under the Currently the industrial area of the park is REACH Initiative for improving the infrastructure occupied by manufacturing companies only. The available to the industry was developing IT parks in occupants include 8 garments manufacturing Jordan. As per the initiative it was suggested that companies and 1 printing press. Out of the 9 these IT parks were to be developed within the next occupants, 7 are foreign companies which run 3 years following different public private partnership their manufacturing facilities mainly using models with the private sector binging in invest- foreign labor. ments and the government providing the necessary CyberCity Industrial and Information policy support. However in spite of a few initiatives Technology Parks Development Company is in the past, Jordan currently does not have any responsible for managing the entire park and operational IT parks. Some of these initiatives provides services including peripheral security, include CyberCity in Irbid and the Hashemite backup electric supply, municipal services, University Technology Park in Zarqa. The maintenance, and transportation services. Hashemite University Technology Park was planned In addition to construction of the industrial and to be developed as a joint venture between the residential space, the promoter has also developed Hashemite University and Hillwood, a USA based the internal roads and other necessary infrastruc- real estate company. As on date the park is yet to ture (e.g., electricity, water connections) inside commence operations. the park. To date the developer has invested CyberCity, irbid around USD$20 million in developing the park. CyberCity is located near Irbid in north Jordan, 85 kms from the capital city of Amman. The project The principal revenues streams for the developer are: was initially conceived in 1999 as a self sustained township which will provide state of the art Sale/Lease of land: The developer sells plots of infrastructural facilities to IT companies complete land at the rate of around USD$4/sq ft. The lease with residential, commercial and recreational rentals, however, vary depending on the area of facilities. However sustained efforts by the developer land leased, period of lease, etc. In case of lease, to attract IT companies have proved unsuccessful. the developer enters into agreements with the Even though the park was commissioned in 2001, lessee usually for a period of 3 years after which till date it does not have any IT companies as the lessee has the option of buying the land. occupants. Sale/Lease of built up space: The developer sells built up space in the park at a rate of around Applying the CLiP framework to CyberCity, irbid USD $11/sq ft. However, in case of built to suit Capital: CyberCity is owned and managed by facilities the rates depend on the requirements of CyberCity Industrial and Information Technology the customer. For leasing built up space the Parks Development Company. The company is a developer enters into lease agreements with the joint venture between the Jordan University of occupants and usually charges a rental of Science and Technology (JUST), a Abu Dhabi based USD$2.5/sq ft. Country Case Studies 113 Facilities Management Fees: The developer is Cybercity is located on the outskirts of the city responsible for internal security and providing all on the Amman-Irbid highway. It is 1 hour from municipal services in the park. However, it has Amman, the capital of Jordan. It is located 30 outsourced most of these services. The developer minutes from the international borders with charges management fees of USD $0.02/sq ft/ Syria, 45 minutes from Israel and 2hours from month. However electricity cost is charged to the Iraq. customer on actual consumption. In the absence of any railway network the only mode of transportation between Amman and Linkages: Given that CyberCity was envisaged as an CyberCity is by road. The quality of road IT park focusing mostly on IT products and network in and around the park is good. software development, linkages with universities, Primary and subsidiary roads support medium research & development institutes and centers of and heavy car and truck movement. Public excellence is critical. The park is located adjacent to transport system in this area is not well the campus of Jordan University of Science and developed and the developer has to operate its Technology and is very close to the Yarmouk own bus service for the locals working in University and Irbid University. However the park CyberCity. does not seem to have any apparent linkages with The nearest international airport is the Queen these universities, given the nature of operations of Alia International Airport in Amman. the current occupants. The park has a robust electricity supply with power The park does not have any dedicated incubators being supplied by Irbid District Electricity supported either by government or the developer Company Limited through 33 kva underground and has not been able to attract local SMEs or start- cable system from the nearest power station at Al up companies who do not find any incentives to Hassan Industrial Estate just 9 kms from relocate in CyberCity. Also the promoter of the CyberCity. The developer has installed back up park being real estate developers does not offer any generator sets to ensure uninterrupted power supply value added services in areas such as marketing in the park. support, business development assistance, or technical assistance. Even though it was planned that the park will have three water wells within its boundaries, currently it infrastructure: Irbid is the 2nd largest city in Jordan depends entirely on supplies from local contrac- after Amman with a population of around a million. tors. Box 18. CyberCity ­ Reasons for Failure at the time of its inception, CyberCity was planned as a Qualified Industrial Zone dedicated to the It industry. However, even 4 years since its inception the park does not have any It companies among its occupants. Some of the main reasons for failing to attract It companies to CyberCity are: locational disadvantage: the remote location of the park, 85 kms from amman has acted as a deterrent in attracting local compa- nies to CyberCity. amman is the largest city of Jordan, which has the highest concentration of It companies and It professionals. absence of specific incentives: In the absence of any specific incentives linked to locating operations in the park other than those offered to the It industry, local companies do not find it attractive to relocate to CyberCity. Political instability in the region: the political instability of the levant region and the proximity of the park to war torn countries like Iraq and Syria has deterred multinational It companies from considering CyberCity as a possible location for their Jordanian operations. no anchor investor: In spite of sustained efforts by the developer and its marketing offices in different countries, the park has failed to attract any large multinational It companies. Inadequate government investments: Inadequate government investments in utility services like water, road and public transport system has affected the infrastructure of the park and has increased project cost for the developer. lack of government support: even though the land was contributed by JUSt, a public university, the project did not receive any subsidy or grants from government to fund infrastructure development. Consequently, the company has made huge investments in infrastructure leading to internal cashflow problems for the developer. (as discussed with Mr. Khaldoun awamleh, Ceo, CyberCity Industry and Information technology Parks development Company) 11 International Good Practice for Establishment of Sustainable IT Parks Initially it was envisaged that CyberCity will have its of many of these countries have consistently own underground communication network of supported the development of the sector through a optical fibre cables. While the basic infrastructure set of fiscal, innovation, people and investment was to be provided by the developer, the cost for the climate policies. The current section details our last mile was to be borne by the occupants. assessment of some of the critical business and However, currently the optical fibre network is not policy enablers which are impacting/are likely to in place and the park is dependant on leased line impact the development of the IT sector in Jordan. connections for network facilities. 5.3.5.1 Sources of capital The initial land-use plan of the park allowed for The country has around 160 companies operating in construction of residential, commercial and the IT sector with none of the companies recording recreational facilities to provide the necessary social annual revenues in excess of USD$20 million. infrastructure for the occupants of the park. Almost all the IT companies in Jordan are concen- Currently the park has around 12,000 sq meters of trated in and around the capital city of Amman. built up residential space which is primarily let out Most of these companies are small and medium to the occupants to accommodate their foreign enterprises funded through promoters contribution. laborers. The park does not have any commercial With bank finance in Jordan linked primarily to facilities other than a small convenience store. The mortgages and collateral securities, it is difficult for quality of life in and around the park is affected by IT companies to access debt. In the absence of any the lack of any recreational facilities in the area and dedicated venture capital fund for the IT sector, the is highly inadequate to attract or retain young industry is facing challenges in providing the professionals who form the bulk of the work force necessary risk capital for start-up ventures. However, for IT companies. there are plans to set up two venture capital funds under the Jordan Upgradation and Modernization People: In the absence of any IT company, the park Program, namely the Jordan Venture Fund and does not provide employment to any IT profession- Jordan Seed Fund with an initial corpus of USD$20 als. Currently around 6,000 people are employed in million and USD$5.6 million respectively. The the park out of which about 3,500 are foreign country has an active and liquid capital market in laborers mostly from India, China and Bangladesh. the form of Amman Stock Exchange which had a The balance of the labor force are locals from the market capitalization of USD$38 bn in 2005, one neighboring cities including Irbid, Ramthan, and of the highest in the region. However, out of the Jarash, who mainly reside outside the park. 224 companies currently listed in the exchange none are IT companies. In the course of our interactions with policymakers and industry associations it has emerged that the Even though the investment promotion laws of the government is planning to develop another IT park country allow 100% FDI in the IT sector, the in Jordan. This park is proposed to be located in the industry has managed to attract only USD$83 outskirts of the capital and the park would be million FDI till the end of 2004 as compared to the developed under a PPP model with government initial target of USD$150 million set under the participation limited to contributing land at REACH initiative. However FDI inflows to the subsidized rates. It is envisaged that specific fiscal sector have increased from USD$60 million in 2001 incentives like tax breaks for locating operations in to USD$83 million in 2004. Sustained efforts by the proposed IT park will be available to occupants the Jordan Investment Board (JIB) and other investment promotion agencies to attract large in addition to those available to the IT sector. global IT companies to Jordan have not succeeded. 5.3.5 Assessment of Critical Business One of the key issues which emerged during our and Policy Enablers interactions with key stakeholders is the relative size It has been observed that most countries which have of some of the major local players. The industry is emerged as global leaders in the IT sector have been largely a diffused and fragmented one even the larger able to leverage some key business enablers which companies generating revenues of less than USD$20 have enabled their IT companies to thrive in the million and employing not more than 200 employ- global marketplace. Additionally, the Governments Country Case Studies 115 ees. None of the local companies have attained the The nearest international airport is the Queen critical mass to compete on a global scale or bid for Alia International Airport which is around 35 large projects internationally. This has adversely kms from the city center. The airport is served by impacted the industry as the local market is small 24 international airlines in addition to Royal and growth opportunities lie only in exports. Jordanian Airlines and handles around 2.3 million passengers every year. Other interna- 5.3.5.2 Anchor investors tional airports in the country include the King In most countries which have performed well in the Hussain International Airport in Aqaba and the IT sector, the growth has been contributed partly by Marka International Airport. domestic companies which have started small and large established anchor investors seeking to expand Jordan has almost no indigenous energy resources to newer geographies to increase their competitive- and energy imports account for nearly 10% of the ness. Microsoft and Cisco have taken up equity GDP. However, over the last decade, the sector has stakes in local companies like Estarta Solutions and undergone significant transformation. Towards the Rubicon. However they do not have any product/ end of the last century the country's power sector software development centers or manufacturing was privatized and deregulated. Currently, the facilities in Jordan. Large global IT hardware country has one transmission company and 3 companies such as Intel and Apple only have limited distribution companies. The Central Electricity trading operations in Jordan. Generating Co., a state owned company is the main generation company with a total installed capacity 5.3.5.3 infrastructure of 1,636 MW. Jordan Electricity Company is Amman, the largest city in Jordan has the largest responsible for electricity distribution in the city concentration of IT companies, followed by cities of Amman. like Irbid, Zarga and Balqa. Since the telecommunication sector was liberalized Amman is the capital of Jordan with a popula- in 2000, a number of private players have entered tion of around 2 million. The Greater Amman the market. Prior to the liberalization of the sector Municipality (GAM) is in charge of the city and fixed line telecom services were provided by Jordan provides all the municipal services in and around Telecom, a government company which has since Amman. GAM is in the process of adopting the been privatized. However in May 2005, the Amman Master Plan to address issues like land Telecomm Regulation Commission granted the use and urban infrastructure in the wake of second fixed telecom license to Batelco, a privately unplanned growth of the city and the sudden owned company. In the mobile telecom sector, the increase in the population of the city. country has 4 privately owned companies. Competition has driven down prices resulting in increased mobile penetration rates (nearly 270 out of every 1000 people). Box 19. Technology Incubators in Currently there are 8 Internet Service Providers in Jordan Jordan which offer dial up internet, leased line, Asymmetric Digital Subscriber Line (ADSL) services the Higher Council of Science and technology (HCSt) had es- tablished the national Consortium for technology and Incubation up to 2mbps speed and Integrated Services Digital of Business in 2002 as a network of nation wide incubators to Network (ISDN) services. International connectivity assist start-ups and small and medium It companies by providing incubation services including equipment and logistical support, is available through submarine optical fibre cables technical and managerial guidance, and financial aid. iPark provided by FLAG Telecom with a landing station ICt Business Incubator, a member of this network of incubators is located in the premises of royal Scientific Society in amman and at Aqaba and 3 earth stations. In the year 2004 the provides a variety of incubation services to start-up It ventures. In country invested nearly USD$150 million in addition, the HCSt runs funds like the Industrial Scientific research developing and upgrading communication infra- and development Fund and the national Fund for enterprises Support to offers financial support to r&d projects in various fields structure. The government in partnership with the including It. during the period 1995 to 2004, HCSt has pro- private sector has embarked on building a nation- vided funds of around USd$5.6 million to more than 160 r &d projects. even though these funds are not directly linked to It they wide high speed broadband network connecting all provide the necessary capital for innovation based projects. the public schools and universities in the country as 11 International Good Practice for Establishment of Sustainable IT Parks part of the Jordan Education Initiative. While the network infrastructure available in Jordan is not at Figure 55. Comparative IT Salaries par with best in class developing countries, the local industry is largely satisfied with the quality and cost South Africa 36696 of the services. 25174 Hungary Brazil 15935 This is primarily because most of the companies are Canada 43841 into software and product development or system Czeck Republic 22500 9800 integration and do not require telecommunication Singapore 41512 facilities for transmitting large volumes of data. Malaysia 21823 However, greater investments need to be made in China 10095 upgrading the network infrastructure if Jordan India 9896 expects to be a major player in voice or data based Thailand 11340 Philippines 12522 outsourcing. Vietnam 6131 5.3.5.4 Human resources 0 10000 20000 30000 40000 50000 Jordan has a total population of nearly 5.5 million Source : neoIT ­ Offshore and Nearshore ITO and BPO salary report and a literacy rate of around 90%, one of the highest in the region creating a large talent pool for the IT industry. Jordan has around 24 universities, 10 public, 14 private and 60 community colleges which offer different courses to nearly 150,000 Republic and Hungary, which have emerged as students. More than 15 universities offer IT related popular outsourcing hubs. courses in Jordan with more than 5,000 IT students graduating every year from these universi- However, local IT companies are facing challenges ties. Currently the industry employs more than in terms of the quality of talent available locally and 16,000 people. are not satisfied with the quality of fresh graduates. The education curriculum of some of the privately The average annual salary offered to Jordanian IT owned universities are not contemporary and often professionals ranges between USD$5,700 to USD do not meet the demands of the industry. $13,900. This is among the lowest in the region due Consequently most IT companies incur significant to which the local industry is facing problems of expenses on training initiatives and certification high attrition, losing resources to other gulf programs for their employees. The government has countries such as UAE and Saudi Arabia. IT salaries started a number of reforms program like the in Jordan are comparable to India and China, and Jordan Education Initiative to bridge the gap much lower than countries like Ireland, Canada, between the education curriculum of the local Israel and East European countries like Czech universities and the requirements of the industry. Since its inception, JEI has supported the develop- ment of 5 e-curricula, trained teachers and intro- duced various new models of classroom teaching Figure 54.Average IT Salaries 2004 focusing on the softer skills. Monthly With English being part of the curriculum in Skill level Salary (uSD) primary and secondary education levels, most of System architect; System analyst 1160 database administrator 910 these students are proficient in both English and Software Quality assurance 775 Arabic. According to reports published by Int@j as System administrator; Internet Programmer; 620 much as 90% of the IT professionals are proficient database designer; technical Writer; in English. 30% of the total population is within the Web Site designer; Software Quality Controller; application Programmer; age group of 15 to 30, providing a large pool of telecommunication engineering young human resource. This pool of young English Multimedia Specialist; network 480 engineering; Web Site developer speaking talent available at a comparative low cost is ideal for BPOs and call centers. Source: Int@j Country Case Studies 117 5.3.6 Government Policies and the sector, the following represent potential op- portunities which can possibly be targeted. Implementation Mechanisms The Ministry of Information and Communication Domestic market opportunities Technology (MoICT) created in 2002 has the At present the industry is mainly dependant on the mandate of formulating policies governing the IT domestic market with exports contributing only industry in the country. Since its inception, the 20% of the revenues. However, the domestic market ministry has issued a number of policy guidelines in Jordan is limited in size having grown by only including the National ICT Policy (Statement of USD$260 million during FY 2001­2004. Government Policy on the Information & According to reports published by Int@j, the domes- Communication Technology Sectors and Postal tic IT market in Jordan is expected to grow from Sectors), the National Strategic Plan, 2004­2007 on USD$440 million in 2004 to USD$550 million by the Information & Communication Technology end of 2006. The inherent size of the local economy Sectors and Postal Sectors and the e-Government may not be adequate for sustaining growth of an IT Strategy. MoICT is also responsible for ensuring sector comprising 160 companies. Despite the effective utilization of IT by government depart- government, as the principal domestic client for the ments and ministries and is in charge of running industry, is implementing a number of e-governance different e-governance programs in Jordan. projects, growth opportunities for the industry appear to be limited. The ICT Advocacy Council (ICTAC) created within the MoICT acts as an interface between the local export market opportunities industry players and the policymakers. It functions as IT export revenues have grown at a CAGR of 26% an advisory body to the Minister and provides critical during FY 2001­FY 2004. Based on our assessment, inputs on policymaking, e-governance programs and significant opportunities are expected in the other key issues impacting the industry. The ICTAC following market segments. includes among its members the Chairman and CEO of Int@j, the principal trade association for the IT Near shore BPO service provider for countries sector in Jordan and acts as an important link like the U.S. and UK, given Jordan's geographic between the industry and the government. location and with salary costs of IT professionals in the country being comparable with China, A high level assessment of the applicable policies has India, Philippines and Thailand, and much been presented in Figure 56. lower than countries such as the Czech Republic, Hungary, and Ireland. In addition to policies for facilitating development Given that the salary cost of IT professionals in of the IT sector, case studies of successful countries Jordan is lower than in other Middle East like Singapore, China and India have also demon- countries like Saudi Arabia (nearly USD$18,000 strated the importance of having efficient imple- per annum), it can position itself as the outsourc- mentation mechanisms. There appears to be scope ing destination for the Middle East. Since Jordan for improvement on this front as far as Jordan is shares a common language (Arabic) with other concerned. For example, while the IPR laws in countries in the region, it enjoys an added Jordan are in line with Agreement on Trade Related advantage in providing voice based outsourcing Aspects of Intellectual Property Rights (TRIPS), the services for the Middle East market. The enforcement mechanism is weak and awareness is outsourcing market in Saudi Arabia, which low. Consequently, IPR infringements are quite represents one of the largest countries in the common in the country. region, is estimated at nearly USD$400 million and is expected to grow at 13% over 2006 to 5.3.7 Potential Growth Opportunities 2010. The existing competencies of the human for the Jordan IT Sector resource pool in Jordan together with its Before attempting to identify specific recommenda- geographical location are expected to serve as key tions for development of the IT sector in Jordan, it competitive advantages viz. a viz. other countries. is imperative that the current and potential market Representative outsourcing activities which can opportunities available to companies operating in be targeted include the following: this sector are identified. Based on our assessment of 118 International Good Practice for Establishment of Sustainable IT Parks Figure 56. Government Policy Instruments broad classification illustrative interventions Fiscal Policies It companies are classified under "Industry" and are subject to a corporate tax rate of 15% as compared to other services or banks and financial institutions which are subject to tax rates of 25% and 35% respectively. Profits earned from export income are exempt from tax. export sales are also exempt from a 16% sales tax. However this provision is applicable to all exports and not just export of It products and services. the Investment Promotion law no. (16) of 1995 offers a number of incentives and exemptions to 6 identi- fied sectors including It. this includes duty free import of "Fixed assets" for a period of 3 years by qualified "Projects". Under the Investment Promotion law, the country is divided into three development zones. Qualifying "Proj- ects" located in these development zones are eligible up to 75% exemption from income and social service taxes for a period of 10 years starting from the date of commencement of such projects. any It company selected as a "qualified project" would enjoy these benefits. Innovation Policies Under the national Science and technology Policy, the Higher Council for Science and technology (HCSt) offers financial support to r&d projects in a number of fields including It, through funds like the Industrial Scientific research and development Fund and the national Fund for enterprises Support. In the Strategy of the Higher Council for Science and technology, 2005­2010, ICt and nanotechnology have been identified as priority areas for providing additional funds and seed capital to start-up companies operating in these sectors. Since Jordan joined Wto in april 2000, a number of IPr related laws, have been enacted. existing IPr laws like the Copyright law, Patents of Invention law and the trademark law have been amended to align the IPr regime of the country with trIPS. Human Capital Policies Jordan education Initiative (JeI) was launched to initiate educational reforms in the country through programs like the education reform for Knowledge economy Program which aims to redesign exiting curricula to meet the requirements of the It industry. even though the country does not have any preferential visa regulations for the It industry, the one Stop Shop run by JIB has simplified procedures for issuing visas and residency approvals for foreign investors and professionals. the labor laws of the country allow local companies to recruit foreign professionals and allows multiple shifts including night shifts. Investment Climate Jordan Investment Board (JIB), offers a number of fiscal benefits to It companies under the Investment Promo- Policies tion law. to facilitate investment in Jordan, JIB has established a one Stop Shop which acts as a single window clearance agency for prospective investors Currently Jordan has dtaas with 19 countries including major It players like UK, France, Canada and India and is in the process of entering into similar agreements with 14 other countries including russia, South africa, Switzerland and Saudi arabia. although, the electronic transactions law was enacted in 2002, it does not have any regulations relating to digital certificates, licensing certification authorities, or cyber crimes. the Competition law enacted in 2004 promotes private entrepreneurship and foreign direct investments in the country. the law attempts to protect small and medium enterprises by prohibiting cartels and monopolies. In Jordan there are no restrictions in FdI in It. Foreign investors can invest and operate in any sector in Jordan other than mining, trade, retail and construction where foreign ownership is limited to 50%. Data-based outsourcing activities related to 5.3.8 Identification of Issues and back office operations such as accounting, Growth Strategies payroll processing, insurance payment/claim Having identified the potential growth opportuni- processing, and internal audit related ties for the Jordan IT sector, it also becomes services. Given that the accounting policies necessary to identify market participants who are and practices followed in Jordan are aligned well placed to drive growth in the respective areas, to international accounting standards and together with potential strategies for development, Jordan already has a mature financial services based on identified good practice in other countries sector, it may have inherent advantages in the assessed as part of the study. area of finance and accounting. Voice-based outsourcing activities such as technical assistance centers and call centers. Country Case Studies 119 Figure 57. IT Sector Growth Segments & Strategies potential growth segments identified issues recommended growth strategies exports data & voice based Market currently dominated by local com- Supporting larger local companies in targeting BPo market panies with inadequate scale of operations in the Middle east initially, followed by europe and the outsourcing It may be relatively difficult to attract global United States players to set up operations, given the Facilitating indirect presence of global players such as limited size of the domestic market and Microsoft and Cisco through joint ventures with local political instability in the region companies Present data communication infrastructure encourage private telecom companies to invest in augment- may be inadequate for large scale interna- ing international data networks with countries in the Middle tional outsourcing operations east initially, followed by europe and the United States 5.3.9 Role of IT Parks and Proposed the adjoining city, intra-park roads, sewerage, and electricity. Business Models State-of-the-art virtual connectivity in terms of It has been demonstrated by the case studies that the data and voice infrastructure including interna- key requirement underlying setting up of sustainable tional connectivity. IT parks is the ability to attract credible occupants Simplified policy implementation mechanisms in to the park, with business models which demon- terms of single window approval facilities in areas strate sustainable viability. Consequently, having such as operating license, sanction of building credible anchor investors in the park has been plans, and tax and customs duty registrations so identified as an essential prerequisite for success as to cut down significantly on the time for both in developed as well as developing countries. In setting up new/expansion operations. the current section, we have attempted to present our assessment of the critical business enablers for IT Parks in Jordan, based on the case studies of In addition, there are a number of potential value parks in other countries as well as ground realities in drivers which are expected to impact specific types Jordan. of IT companies, with the level of interest also expected to vary across different categories of IT The generic critical business enablers which are players (please refer Figure 58 below for details). likely to feature in the expectations of any IT company have been highlighted below: The IT Park case studies and primary interactions with various stakeholders clearly seem to demonstrate Location of the park in an area which permits it a case for management of the IT Parks to be vested to leverage the existing urban and social infra- with private sector players for ensuring adequate structure of the capital city of Amman as accountability and efficient service. Possibly, as has availability of the right quality of human been the case in many other countries, existing resources is expected to be a problem in any facility management companies can be considered for other region. this purpose. Good practice in other countries clearly Lease or sale of land for built-to-suit facilities at indicate the need for management control of the park rates lower than those prevailing in the adjoining development company to vest with the private sector areas. for higher efficiency & productivity. Consequently, a High quality physical connectivity and infra- facilitation role is recommended for the government structure including air (both international & other than in situations where the land is owned by domestic), road and rail connectivity, a combina- it. In such situations, the government can possibly tion of multi-tenant buildings with contempo- pick up an equity stake in the development company, rary facilities and build-to-suit options, adequate given that financial returns on IT parks have been road & other surface transport connectivity with fairly attractive. 120 International Good Practice for Establishment of Sustainable IT Parks Figure 58. IT Parks ­ Segment Specific Drivers type of it companies Key value proposition of it parks, if any local software, It & Motivating factors: reduction of time to market for expansions; Fiscal concessions, if applicable; Built to suit BPo services companies options for custom development centers; need for state of art facilities for facilitating accreditation; domestic venture capital/private equity support; lower investments in ancillary infrastructure & facilities management global software, It & delimiters: existing investments in infrastructure for players with existing facilities; limited growth pressures BPo services companies on account of small size of domestic market and small size of export market opportunities Potential growth opportunities for export oriented BPo services companies seem to be higher May not constitute an immediate target segment, given political instability in region and limited size of domestic market 5.3.10 Policy enablers IT Park occupants are offered a set of additional In almost all the countries assessed under this study, benefits over and above those available to IT it has been observed that government policies have companies not operating out of IT Parks. played a pivotal role in development of IT sector. Consequently, the Policy Good Practice high- The role of government in most countries has also lighted for IT sector development would also be been observed to evolve over time, with a more applicable to IT Park occupants, other than in direct role during the initial stages of sector cases where additional concessions have been development gradually moving to a facilitative role envisaged in a specific area. with the picking up of private sector led growth. The measures outlined below only represent good The current section of the report highlights Policy practice adopted by other countries covered as part Good Practice which can be leveraged given the of the study. Consequently, these can at best be existing scenario in Jordan, based on the countries treated as starting points and additional analysis analyzed as part of the study. For purposes of would be required for assessing their budgetary & analysis, the good practice have been categorized other impact for customizing these to meet the into i) policies for developing the IT sector in the requirements of Jordan, should the government country and ii) Policy Good Practice for develop- decide to consider any of these for implementation. ment of IT Parks. Figures 59 and 60 below outline relevant Policy Good Practice for facilitating development of the IT Sector and IT Parks respectively. As has been assessed during the study, Country Case Studies 121 Figure 59. Policy Good Practice for IT Sector Development Key issues/ recommended Strategies policy Good practice which can be considered encourage local It com- Fiscal incentives panies to improve scale of allowing local It companies duty-free import of capital goods for use in It & BPo Services exports. operations through BPo Providing fiscal incentives like import duty exemptions on capital equipments, investment subsidy Services exports, initially to private telecom companies on investments made in augmenting international data connectivity, with a focus on the Middle initially with a focus on the Middle east, followed by europe and United States. east, followed by europe and the United States Human resource policies establishing finishing schools through public private partnership to train students in managerial and encourage private telecom business aptitude, with the infrastructure being provided by government and curriculum & faculty companies to invest in being provided by It companies. augmenting international Constituting a committee comprising government officials and It company representatives to assess data connectivity the existing curriculum for specific courses, based on requirements of It companies. Providing fiscal incentives to companies for training employees like tax breaks on training costs. augment talent pool for encouraging local universities to increase intake of students in finance & accounting and motivating finance & accounting and students to pursue this area through targeted financial support. other BPo Services investment climate policies Further development of the Implementing a single window mechanism for providing all benefits, concessions & permits to It com- financial services sector for panies. this would require a single agency within government to be identified as the nodal agency, meeting funding require- with a presence in all key cities, which would then process applications seamlessly in coordination ments of local It companies with other Ministries. Streamline policy implemen- extending all the above concessions to local companies, subject to completion of listing on amman tation mechanisms Stock exchange within a pre-defined period and extending additional fiscal benefits on successful listing on international stock exchanges. Supporting listing of It companies on amman Stock exchange through measures such as lower threshold of paid up capital requirements and reimbursing initial listing fees. Formulating policies for attracting global venture capital and private equity funds like exemption of tax on income from investments and allowing losses to be deducted from other taxable income. Figure 60. Policy Good Practice for IT Park Development Key issues/ recommended Strategies policy Good practice which can be considered local companies involved Fiscal incentives in It & BPo Services Providing incremental fiscal incentives to potential It Park occupants like corporate tax holidays for an exports driven by growth initial period (say 5 years). pressures constitute the Providing land owned by government for development and to It Park occupants at subsidized rates, primary target segment, depending on level of employment generation with potential motivators Supporting It Park developers by subsidizing rentals for plug & play infrastructure and land lease including incremental fiscal rates for an initial period (say 3 years), so that a part of these subsidies can be passed on to poten- benefits, if available and tial occupants, thereby creating a differentiation viz. a viz. normal office/commercial infrastructure. lower rent/lease rentals innovation policies given the existence of pri- Provide incubation facilities & space with world class plug & play infrastructure within the It parks to vate real estate companies, start-ups and small & mid-sized It companies at subsidized rentals for the initial period. it may be possible to attract private developers for It investment climate Park development Permitting mixed land use in It Parks by earmarking a proportion of the total land for commercial (say 70 %) and residential (say 30 %), thereby improving project viability. Implementing a single window mechanism for fiscal concessions & benefits, as well as all required statutory approvals, with a physical presence in the Park. extending all the above concessions to local companies, subject to completion of listing on local stock exchange within a pre-defined period and extending additional fiscal benefits on successful listing on international stock exchanges. extending special concessions to all financial entities like banks, financial institutions, venture capital & private equity funds located in the It Park. representative concessions/benefits include tax exemp- tion on income of such units for an initial number of years (say 5 years). 122 International Good Practice for Establishment of Sustainable IT Parks appendices 12 International Good Practice for Establishment of Sustainable IT Parks Multi tenanted building in Hitec City, Hyderabad internal rate of return year 1 2 3 4 5 6 7 8 9 10 11 cash inflows: Sale proceeds 6600000 3300000 3300000 rentals 2745468 2855287 2969498 3088278 3211809 3340282 3473893 3612849 3757363 4057952 Maintenance 60000 60000 60000 60000 60000 60000 60000 60000 60000 64800 Charges Cash Outflows: repairs and 876872 876872 876872 876872 876872 876872 876872 876872 876872 876872 Maintenance Cost of Provision 54000 54000 54000 54000 54000 54000 54000 54000 54000 58320 of services Initial investment 14000000 14000000 terminal Value of land net cash inflow ­14000000 ­5525404 5284414 5398626 2217406 2340937 2469409 2603021 2741976 2886490 3187559 internal rate of return year 12 13 14 15 16 17 18 19 20 21 22 cash inflows: Sale proceeds rentals 4382588 4733195 5111850 5520798 5962462 6439459 6954616 7510985 8111864 8760813 9461678 Maintenance 69984 75583 81629 88160 95212 102829 111056 119940 129535 139898 151090 Charges cash outflows: repairs and 876872 876872 876872 876872 876872 876872 876872 876872 876872 876872 876872 Maintenance Cost of Provision 62986 68024 73466 79344 85691 92547 99950 107946 116582 125909 135981 of services Initial investment terminal Value of land net cash inflow 3512714 3863881 4243141 4652742 5095111 5572870 6088849 6646107 7247945 7897930 8599915 Appendix 1: Indicative Internal Rate of Return for Select IT Parks appendix 1 Indicative Internal rate of return for Select It Parks 125 12 Multi tenanted building in Hitec City, Hyderabad internal rate of return year 23 24 25 26 27 28 29 30 31 32 cash inflows: Sale proceeds rentals 10218612 11036101 11918989 12872509 13902309 15014494 16215653 17512906 18913938 20427053 Maintenance 163177 176232 190330 205557 222001 239761 258942 279657 302030 326192 Charges cash outflows: repairs and 876872 876872 876872 876872 876872 876872 876872 876872 876872 876872 Maintenance Cost of Provision 146860 158608 171297 185001 199801 215785 233048 251692 271827 293573 of services Initial investment terminal Value 18121801 of land net cash inflow 9358058 10176852 11061150 12016192 13047637 14161598 15364675 16663999 18067269 37704602 Irr 15.62% all figures in USd area of land: 6 acres; Build-up area: 600,000 sft (Based on secondary research and expert opinions) International Good Practice for Establishment of Sustainable IT Parks residential building in Hitec City, Hyderabad internal rate of return year 1 2 3 4 land Cost 2173913 Construction Cost 2708868 6772171 4063302 revenue from Sales 4209728 7367024 9471889 Cash Flows ­4882781 ­2562442 3303722 9471889 Irr 25% Values in USd land area: 5 acres; Built-up space: 545,000 sft (Based on secondary research & expert interviews ) Appendix 1: Indicative Internal Rate of Return for Select IT Parks 127 128 International Good Practice for Establishment of Sustainable IT Parks Multi tenanted building at CFZ, Malaysia internal rate of return year 1 2 3 4 5 6 7 8 9 10 land Cost 648649 Contruction Cost 3824324 5258446 478041 revenue realization 795945 1002891 1228542 1474250 1741458 1991067 2133286 terminal value Cash Flows ­4472973 ­5258446 ­478041 795945 1002891 1228542 1474250 1741458 1991067 2133286 internal rate of return year 11 12 13 14 15 16 17 18 19 20 land Cost Contruction Cost revenue realization 2239950 2351948 2469545 2593022 2722674 2858807 3001748 3151835 3309427 3474898 terminal value Cash Flows 2239950 2351948 2469545 2593022 2722674 2858807 3001748 3151835 3309427 3474898 internal rate of return year 21 22 23 24 25 26 27 28 29 30 land Cost Contruction Cost revenue realization 3648643 3831075 4022629 4223760 4434948 4656696 4889530 5134007 5390707 5660242.7 terminal value 10209459 Cash Flows 3648643 3831075 4022629 4223760 4434948 4656696 4889530 5134007 5390707 15869702 Irr 15% all values in USd land area­ 40,000 sft & built-up space 100,000 sft life of the project assumed to be 30 years Based on secondary research & expert interviews) Appendix 2: Indicative Internal Rate of Return for Select IT Parks appendix 2 Indicative Internal rate of return for Select It Parks 129 10 residential building at CFZ, Malaysia internal rate of return year 1 2 3 4 5 6 7 8 9 10 land Cost 1216216 Contruction Cost 709459.5 3547297 2837838 rentals 1352720 1623265 1917481 2125208 2348915 2466360 2589678 terminal value Cash Flows ­1925676 ­3547297 ­2837838 1352720 1623265 1917481 2125208 2348915 2466360 2589678 internal rate of return year 11 12 13 14 15 16 17 18 19 20 land Cost Contruction Cost rentals 2719162 2855120 2997876 3147770 3305159 3470417 3643937 3826134 4017441 4218313 terminal value Cash Flows 2719162 2855120 2997876 3147770 3305159 3470417 3643937 3826134 4017441 4218313 internal rate of return International Good Practice for Establishment of Sustainable IT Parks year 21 22 23 24 25 26 27 28 29 30 land Cost Contruction Cost rentals 4429229 4650690 4883225 5127386 5383755 5652943 5935590 6232370 6543988 6871187.5 terminal value 8310810.8 Cash Flows 4429229 4650690 4883225 5127386 5383755 5652943 5935590 6232370 6543988 15181998 Irr 22% All values in USD land area 100,000 sft and built-up area 200,000 sft life of the project assumed to be 30 years (Based on secondary research & expert interviews ) appendix 3 discussion Participants Ajay Nane Information Technology and Communications Senior Manager-Operations Department, Government of Andhra Pradesh, K. Raheja IT Park (Hyderabad) Pvt. Ltd, India India Chew Leng Leng M. Gopi Krishna, IPS Senior Manager-Marketing Special Secretary ­ IT Promotions JTC Corporation, Singapore Information Technology and Communications Department, Government of Andhra Pradesh, D. Parthasaradhu Rao India Chief Engineer Andhra Pradesh Industrial Infrastructure Corporation Mrutyunjay M. Ganiger Limited, Hyderabad, India Senior Manager Neilsoft, Hubli, India E. Manoj Kumar Additional Director N.R. Manjunath Software Development Park of India, Hyderabad, Deputy Manager-IT Promotions India Karnataka State Electronics Development Corporation Limited, Bangalore, India Fung Chan Hua Head Risk & HSE services, Ng Wan Peng DNV Technology Services, Singapore Vice President, Capacity Development Division Multimedia Development Corporation Sdn Bhd, G. Subrahmanyam Malaysia Sr. Manager-Finance L&T Infocity Limited, Hyderabad, India P. Raghuveer, IFS Additional Secretary, ITC H. Devanand Information Technology and Communications Assistant Manager Department, Government of Andhra Pradesh, Karnataka State Electronics Development India Corporation Limited, Hubli, India R. Balasundaram General Manager, Corporate Finance Harikumar Krishnannair Setia Haruman Sdn Bhd, Malaysia Head-Knowledge & Learning Keane, Hyderabad, India R. Sridaran Chief Operating Officer Dr. K. Ramachandran L&T Infocity Limited, Hyderabad, India Entrepreneurship, Family Business & Strategy Chair Indian School of Business, Hyderabad, India Rahmah Daud Senior Executive, Media, Corporate K. Ratna Prabha, IAS Communications Secretary ­ Information Technology & Multimedia Development Corporation Sdn Bhd, Communication Department Malaysia Appendix 3: Discussion Participants 131 Col. S.V. Ramachandran Dr. Tan Geok Leng Regional Director Chief Technology Officer & Senior Director National Association of Software & Services Infocomm Development Authority of Singapore, Companies, Hyderabad Chapter, India Singapore S. Vaman Kumar Vithal Suryavanshi Asst. Manager-Administer and Human Resource Senior Manager-Sales Software Development (SDT) Technologies, Cyber K. Raheja Corporation, Mumbai, India Gateway, Hyderabad, India Xia, Yingqi (PhD) Shakti Sagar Deputy Director Ex-President Administrative Committee of Zhingguancun HYSEA (Hyderabad Software Exporters Association), Science Park India The People's Government of Beijing Municipality Shao Shunchang Vietnam Division Chief, Senior Engineer Bui Duc Tuan Division of Promoting Investment and Financing Deputy Director Administrative Committee of Zhingguancun E-Commerce and Information Department Science Park Vietnam Chamber of Commerce and Industry The People's Government of Beijing Municipality Chu Tien Dzung Siti Nor Sarida Saidin General Director Manager, Corporate Communications, Quang Trung Software City Development Company Setia Haruman Sdn Bhd, Malaysia Dao Thanh Quyet Dr. Subbarao Ghanta Deputy General Manager General Affairs State Chief Information Officer & E.O. Special Department Secretary to Chief Minister Nidek Tosok (Vietnam) Co. Ltd. Information Technology and Communications Department, Government of Andhra Pradesh, India Dr. Dinh The Phong High Tech Department Subhod K. Hungund Ministry of Science and Technology Technical Officer STPI-Hubli, India Lai Tan Binh Business Development Manager T. Gopal Krishna Quang Trung Software Business Incubator Co. Ltd. Industries Promotion Officer Karnataka Biotechnology and Information Lai Tuan Vuong Technology Co-operation and Investment Promotion Division Services, Government of Karnataka, Bangalore, India Department of Planning and Investment The People's Committee of Hochimihn-City T. R. Manjunath Head-IT Education Lam Long Karnataka State Electronics Development Chief of Investment and Trade Promotion Corporation Limited, Bangalore, India Quang Trung Software City Development Company T. Sreenivasulu Reddy Academic Director Le Tan Thanh Institute for Electronic Governance, Hyderabad, Deputy Director, Sales India SSP 12 International Good Practice for Establishment of Sustainable IT Parks Nguyen Thanh Huyen Truong H. Nguyen Deputy Head of Sales & Marketing Department VP/Director of Business & Technology SaigonCTT Development IDG Ventures Nguyen Thanh Nam Director Vu Anh Dzung FPT Technology Development General Director Membership and Training Department Dr. Nguyen Thi Hoang Lan Vietnam Chamber of Commerce and Industry Vice-Dean, Faculty of Information Technology Head, Department of Data Communications & Wolf Rienow Computer Networks EU Senior Adviser Hanoi University of Technology Quang Trung Software Business Incubator Co. Ltd. Nguyen Thi Hai Diep Jordan CEO Assistant Abeer Al Refai GHP Far East Company Ltd. Chief Operating Officer The American Chamber of Commerce in Jordan Ngugen Trang Duang IT Industry Department Anna Maria Toth Salameh Ministry of Post & Telematics of Vietnam Trade Specialist The American Chamber of Commerce in Jordan Phan Dihn Anh Van Investment and Trade Promotion Department Batoul Ajlouni Quang Trung Software City Development Company VP/Business Development Integrated Technology Group Pham Mihn Tuan Vice Director Hanna Zaghloul Executive Center for Research and Consulting Management Vice President IDEAL Hanoi University of Technology Group Than Trong Phuc Issa Gammoh Country Manager Assistant CEO Vietnam and Indochina Jordan Investment Board Intel Khaldoun Awamleh Thinh Nguyen CEO CEO CyberCity PSD Osama A. Jarrar Tran Doan Kim Infrastructure Unit (IU) Manager Head of Vinasa Office Estarta Vietnam Software Association Omar Hamarneh Tran Thanh Son Director Private Sector Development Specialist iPark The World Bank Omar Shboul Tran Quang Hung Director-Business Development Director Estarta NTS Engineering Solutions Ltd Appendix 3: Discussion Participants 133 Ra'ad N. Habhab Christopher S. Morris Engineering Department Finance Director, CIS Region CyberCity Sun Microsystems Rami Nabulsi Evgeny Preobrazhensky Technical Team Leader Chief Executive Officer Astroleap Infowatch Rana Diab Ilia A. Dubisky Executive Director Investment Officer, Central & Eastern Europe Jordan Intellectual Property Association Department International Finance Corporation Sabri Tabbaa Chief Executive Officer Joy Dasgupta int@j, Information Technology Association-Jordan Business Development Manager Optima Saed Zaidan Solutions Consultant Leonid Boguslavsky Estarta Chairman ru-Net Holdings and TOPS Dr. Suhair Khatib Advisor Natalia Akulinicheva Ministry of Information Communication Updates & Sales Manager Technology Garant Service Ziddon Makhamreh Maxim Kalmykov Assemblers Program Manager Director of Regional Business Development, Russia/ Intel, Jordan CIS Cisco Systems russia Andrey N. Svechnikov Mikhail Y. Luchinkin Head of the Division for International Deputy Head of the Department Organizations Department for State Programs Development of Ministry for Information Technologies & Infrastructure & Use of Limited Resources Ministry Communications of the Russian Federation for Information Technologies & Communications of the Russian Federation Alexey Gostomelsky Director of Finance & Investment E Petrova Value Tech Advisers Investment Bank Ministry for Information Technologies & Communications of the Russian Federation Alexender Kravtsov Communication Director Pavel Barbashev American Chamber of Commerce in Russia Marketing Director Horus Capital Andrew B. Somers President Rajnish Giridhar American Chamber of Commerce in Russia Vice President & Head ­ Retail Assets Division ICICI Bank Boris Volpe Chief Operating Officer Svetlana V. Leshcheva SAP Operations Analysts The World Bank 1 International Good Practice for Establishment of Sustainable IT Parks Samir M. Suleymanov R. Akopov Coordinator Director for Russia Programs Upscale Soft The World Bank Mikhail Khassine Vasilly A. Petrechenko Manager Head of Consultancy Services Deutsche Bank, Moscow Moscow State University Science Park Greg Robert Valentin Makarov Manager President Deutsche Bank, Moscow RUSSOFT Steve Chase Alexander Yurov President Director Intel, Russia Fog Software Igor Makarov Chairman, Legal Committee Russian Venture Capital Association Appendix 3: Discussion Participants 135 1 International Good Practice for Establishment of Sustainable IT Parks references china Malaysia: "Ministry of Science and Technology of the People's "Malaysia Trade and Industry Portal" ­ Special Republic of China" ­ Policies & Regulations grants and subsidies for SME Available at: Available at: http://www.most.gov.cn/eng/ http://www.miti.gov.my/ekpweb/application? policies/regulations/index.htm. August, 2006 JSESSIONID=Ecc0BZaoi5HLWL8PntvHco Xiaomin, Wang. 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Legislative Acts in Connection with the com/misc/reksoft_co/files/169/rus_it_ Adoption of the Federal Law on Special quarterly_oct_2006.pdf RVCA, "RVCA Economic Zones in the Russian Federation Yearbook 2004", 2004 (with the Amendments and Additions of Steven Hawk and William McHenry, "The January 10, 2006) Maturation of the Russian Offshore Software Federal Law No. 144-FZ of July 27, 2006 On Industry", Journal of Information Technology amending part two of the tax code of the and Development, 2005 Russian Federation, as regards the creation of The Government of the Russian Federation ­ favourable taxation conditions for taxpayers Federal Tax Services ­ http://www.nalog.ru/ engaged activities in the field of information doceng.php?id=7220&topic=eng_sotrudnich technologies, as well as on making other Yana Selioukova, "IT Market Growth Centers in amendments aimed at enhancing the Russia: Moscow, St. Petersburg and efficiency of the tax structure Novosibirsk", Northern Dimension Research Federal Law No. 160-FZ of July 9, 1999 on Foreign Centre, Lappeenranta University of Investment in the Russian Federation (with Technology, 2005 the Amendments and Additions of July 25, 2002, December 8, 2003, July 22, 2005, June 3, 2006) References 139 About infoDev infodev is global development financing program among international development agencies, coordinated and served by an expert Secretariat housed at the World Bank group, one of its key donors and founders. It acts as a neutral convener of dialogue, and as a coordinator of joint action among bilateral and multilateral donors--supporting global sharing of information on ICt for development (ICt4d), and helping to reduce duplication of efforts and investments. infodev also forms partnerships with public and private-sector organizations who are innovators in the field of ICt4d. the infodev Secretariat is housed in the global ICt department (gICt) of the World Bank group. For additional information about this study or more general information on infodev, please visit www.infodev.org/innovation or contact Seth ayers, infodev (email: sayers@worldbank.org or tel: +1.202.473.4868). www.infodev.org Information for Development Program www.infoDev.org www.infoDev.org