Romania's IT industry struggles to move beyond low-cost outsourcing

By bne IntelliNews February 5, 2007

Anca Paduraru in Romania -

To great fanfare, Bill Gates opened a call centre to service Microsoft clients in Europe on Thursday in Bucharest, which relegated the visit to Romania of the French Prime Minister Dominique de Villepin to a footnote in the day's newscasts.

The enormous interest that Gates' arrival aroused in Romania, which included adorning the city's main boulevard with the Windows logo, has much to do with how great the expectations are that the country will profit hugely from its IT industry and the process of outsourcing from Western companies.

A star in Romania

Certainly, the industry has grown rapidly in the past seven years, with sales rising almost nine times, from €125m in 2000 to an estimated €1bn in 2006, according to the Department of Foreign Trade.

These figures look impressive, though to put them in context the IT industry, meaning both software development and outsourcing, made up only 0.79% of the country's GDP in 2006, up from just 0.25% in 2000.

The one Romanian who has struck it big in the IT business, when he sold his RAV antivirus program to Microsoft in 2003, is disenchanted with the current state of the domestic IT industry.

Radu Georgescu told bne that less than 5% of the 13,200 IT companies counted by the National Institute for Statistics are actually doing software development, with the rest focused on outsourcing.

"They hire brains per hour, and do not develop complete products to market under their own brand-name," says Georgescu. "How many Romanian products could you list at the top of your head? Two. How many could one identify with the Czech Republic? 20: a country half our population has 10-times more internationally recognized products."

He explained that unlike the Czech Republic, Romania followed a path similar to that of Poland, which attracted big international companies with big money and went into outsourcing.

"Having Bill Gates opening a support centre in Bucharest is not a small thing, do not get me wrong, but it still is in the same vein; it would have been a different thing having a development centre opened here. We are still the venue for cheap, skilled, and languages proficient labour," says Georgescu, who after selling his product to Microsoft worked as a consultant for the company until last fall.

Plugging the brain drain

The Romanian government is taking steps to alter that lack of visibility and a coherent policy for the country's IT industry. To stop the brain-drain, the government has given tax breaks to software developers for the past four years. This had to end this year because of a ruling from the competition authorities, however.

This year the government will start marketing internationally both Romania and its IT products under the RomaniaIT brand to be launched in March, at the CeBit trade show in Hanover, Germany, and in April, at the US Gartner ITxpo fair, in San Francisco.

Georgescu believes the future is bright for Romania's IT industry. "First of all, we are still at a very low point, in spite of our love for the subject, so the road can lead only up. However, success will come when the industry will get that critical mass, in terms of number of companies able to distribute internationally their own products," said he. "We are not yet there."

The support centre opened by Gates in Romania will employ some 95 Romanian IT experts; at its headquarters in Redmond, Microsoft employs some 300 Romanians. The company opened shop in Bucharest 10 years ago.

President Traian Basescu and Prime Minister Calin Popescu Tariceanu also attended the opening ceremony of the Microsoft support centre, with Basescu decorating Gates with the country's highest order: the Romanian Star, with the rank of commander.

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