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During the 15.967 seminar, we have learned that although many countries are benefiting tremendously from the outsourcing and offshoring of white-collar, high-tech jobs from the US into other geographies (most notably India), the reality is that the outsourcing revolution has not yet materialized in terms of job migration as much as many pundits predict. However, the trend towards outsourcing and offshoring has certainly hit the world scenario and it is here to stay. One key aspect of the nature of business today cannot be refuted: labor is becoming more and more mobile, country boundaries are becoming more and more blurry and global firms will migrate jobs into those locations in which they can get the highest impact for their investments.
Based on this premise, the winners of tomorrow will be those countries that not only have a high supply of high-tech jobs but also those that are able to sell their assets in the most persuasive manner. There is no question that India, based on a booming internal IT and software market and its sheer labor size and cost, has excelled in training a highly sophisticated IT labor force, but most importantly, India’s success in selling the outsourcing proposition and delivering benefits to their customers are second to no other country.
We became fascinated about analyzing country strategies to promote IT development and focus on analyzing which other markets, besides India, can develop the internal and external consistencies to reap the benefits of the trend towards outsourcing. Specifically, we became interested in zooming in on the software development strategies of Argentina and Uruguay. Given that both these countries have developed significant software expertise and have an untapped potential, we will analyze whether these countries are pointed in the right direction to capture a significant amount of outsourcing opportunities in the future.
Although we originally intended to compare both countries’ software strategies with that of
India’s, upon further research we realized that India and Argentina (let alone Uruguay) have very different characteristics in terms of size, geographic position, labor trends, cost structures, that make the comparison more difficult at this stage of their respective IT development. However, we are going to use the successful technology case studies of Ireland, Israel and Costa Rica as yardsticks to compare the software industry in Uruguay (which share very similar characteristics).
We will then focus on the core competencies of the Argentinean software market and its current cost advantage based on a devalued currency. We will then draw informed conclusions on the future outsourcing potential on the IT industry of Uruguay and Argentina.

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Based on a century and a half-long tradition of democracy (albeit an 11-year period of military rule in 1972-1983), Uruguay stands out in the international scene as a country with an ingrained respect for democratic institutions and for the people’s active participation in civil life.
Entrenched in the mentality of the Uruguayan people, is the idea that the government must provide not only the basic needs of the population but also employment and life-long security
(see Exhibit 1 for basic macroeconomic and social indicators). This dates back to Uruguay’s famous welfare state created in the first half of the 20th century, when the government could afford employing close to half of the population and ensuring a healthy pension system to the old.
At that time, Uruguay’s exports of livestock and agricultural products to the European countries created such wealth that the government got away with heavy taxation and intervention in every major economic activity of the economy.
Uruguay’s large welfare state translated in a robust and public education system that depended entirely on government resources but sustained Uruguay’s largest middle-class population within the Latin American context. However, as the country’s exports of agriculture and livestock products became commoditized throughout the second half of the 20th century, the Uruguayan government was left without the major source of revenues to afford its big welfare state. The inability of the government to reinvent itself coupled with the demands of Uruguay’s large middle class sector, which became dependent on government employment and pension systems, stretched the government to the limit.
Because the government has heavily intervened in the economic life of the country for most of the 20 th century, it has crowded out the development of a strong private sector. Except for the financial system which has given Uruguay the reputation of being the “Switzerland of America”1,
1 According to Euromonitor , “Uruguay is a small country of three million inhabitants wedged between the two Latin American powerhouses, Argentina and Brazil, and has often been nicknamed the "Switzerland" of Latin America. It has earned this reputation as much for its relative political stability, its formerly

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Uruguay’s private sector has grown at the shadow of the public sector. As a result, foreign investments as a share of GDP have remained one of the lowest in Latin America (please refer to
Exhibit 2 on Uruguay’s FDI information).
Instead of rising to the hour and slashing its bloated size, Uruguay’s government took to the international financial community throughout the past 20 years to pay the bill for its public servants consisting of 27% of the total 2003 population. As a result, Uruguay’s public external debt remained excessively high, even for Latin American standards. In fact, due to the 18% fall in
GDP since 1998 and the large devaluation of the Uruguayan peso occurring in 2002, public external debt has jumped to 111% of GDP, up from 40% in 1998 (see Exhibit 3 for figures on the impact of the recent financial crisis).
In a country whose government is highly interventionist and where the economy is mainly driven by the primary sector exports 2 , it is remarkable that Uruguay has managed to grow an extremely competitive software industry during the 1990’s. Indeed, in the latter part of the 1990’s and the beginning of the new century, Uruguay has not remained aloof to the world’s IT fever. The internal market of IT-related products and services has significantly grown during these years, reaching a peak value of $326M in 1999 3 from a mere $50M in 1989. Since then, the IT internal market in Uruguay has settled in a value of around $300M (see Exhibit 3 and 4 for the value added by this sector to the country’s GDP).
As shown in Exhibit 4 , the software industry makes up almost a third of the internal IT market in
Uruguay (which we consider to comprise software products and software licenses sectors), meaning a market size of $189.75M. Since it is estimated that 27-30% of the software sold in
Uruguay is developed by national companies, Uruguayan companies produced in 2001 approximately $60M of software for national use. More remarkable, however, is the information exemplary welfare system and its high literacy rate, as for its banking secrecy laws,” Qassim Ali,
London: Apr 1994.
3 Promotion of Export-Oriented Foreign Direct Investment in Uruguay, Graciana del Castillo
3 Distribution of Uruguay’s GDP: Services: 67%, Industry: 26%, Agriculture:6%

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IT POTENTIAL shown in Exhibit 4 , which shows how Uruguayan companies are exporting $83.5M in 2002, with
Argentina, Colombia, Brazil and Chile being its main target markets. The Uruguayan Chamber of
Information Technology, CUTI (a private association of software companies) reports that exports in the Uruguayan software industry have increased 1330% between 1994 and 1999. However, private investment in Uruguay had traditionally meant facing high taxes and awkward bureaucracy and a weak copyright law.
Although in comparison to the software industries of other developed countries, these numbers may look insignificant, it is certainly remarkable how a small and not fully developed country such as Uruguay is covering domestically one third of its software needs. Even more surprising is the fact that this domestically grown industry is currently exporting twice the value of its internal production. Without having any additional information, this dramatic success would normally lead us to believe that the Uruguayan government is purposely imitating the IT development models of other countries that have been extremely successful at exploiting the advantage of the
IT revolution, such as Ireland or Israel.
Yet, we shall see how the degree of government intervention required to encourage the generation of a robust software industry in Uruguay was much lighter than that in Ireland or in Israel and relied to a great extent in autonomous development. This approach to the development of the IT industry with only limited government involvement is what we shall call “organic growth”. In order to prove that the Uruguayan development of its IT sector has distinctive peculiarities, we shall compare it with other two well known case studies. Important conclusion will be drawn to highlight the potential for future growth and in particular, the potential to attract outsourcing demand into Uruguay.
It is certainly tempting to try to establish similarities between the IT Uruguayan evolution and the astonishing successes in this field during the 1990’s of the economies of Ireland and Israel.
Much of the success of Ireland’s radical transformation from an agricultural economy into one of the world’s leading IT hubs is due to the endeavor of the Irish Investment Development Authority
(IDA). The IDA was created specifically to promote FDI in Ireland. This agency, along with an aggressive governmental policy of low taxes (Ireland has a corporate tax of 12%, one of the

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Multinational Corporations on the IT segment to target the European Union market. This strategy certainly worked, bringing Ireland’s GDP growth up to 11% in 1999.
Clearly, the most radical difference between the Irish and Uruguayan approaches would be the complete lack of a central directing agency in Uruguay with the purpose of encouraging the development of internal IT industries and promoting them towards foreign investors. A second factor is that the approach that each country took towards tax policies in the technology sector is quite different. Although the Uruguayan government did introduce some tax incentives, these -we shall see- were mainly reflected on Free Trade Zones (henceforth FTZ) which were mainly conceived towards attracting FDI, rather than directly fostering domestic companies.
A third similarity between Ireland and Uruguay would be their membership to supranational economical entities of great scale, such as the European Union and MERCOSUR. It is undeniable that, had Ireland not belonged to the European Union, much of its appeal to foreign high-tech companies that saw it as a perfect gateway to Europe would have been lost. Although it does not have the long history of the EU, the possibility of using Uruguay as a base to penetrate
MERCOSUR markets can certainly be an appealing point for foreign companies. Yet, the tax incentives given to FTZ proved to be a fiasco in this respect: other MERCOSUR countries responded to the FTZ policy by banning all companies established in the Uruguayan FTZs from receiving custom exemptions that were part of the MERCOSUR agreement. Thus, for IT companies with great interest in the MERCOSUR market, the Uruguayan FTZ policy would be more of a deterrent to establish themselves in Uruguay, rather than an appealing point.
If the case of the software success in Uruguay does not resemble the Irish success story, how is it then that such a small country embedded in a region not necessarily famous for high tech development, created such a vibrant and innovative sector? In search of an answer, we then focused on the specific ingredients that made Israel an internationally recognized IT hub, dubbed as the Silicon Valley of the Middle East. Given the small size of both Israel and Uruguay and its strong education system, this comparison could shed light into the basis for success in Uruguay.
Since the Irish Model seems not to be applicable to Uruguay, it is tempting to think that perhaps the IT growth in Uruguay could be due to causes similar to those of Israel in the last decade of the

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In Israel, strong pro-FDI incentive policies such as the Irish ones were not implemented. Rather, the Israeli IT growth was generated by its sheer intellectual power, obtained after many years of migrations of very highly educated workers (engineers, computer scientists, etc.). The perfect complement for this was the generation of a dynamic venture capital community that was encouraged by governmental programs and aimed at promoting grass-roots entrepreneurship in the high-tech industry.
However, the Uruguayan growth cannot also be explained well by the Israeli model. Admittedly, the Uruguayan IT sector has been labeled the pride of Uruguayan industry and there is a general perception in the country that this growth was mainly driven by a high number of well trained IT experts. However, a look at Exhibit 5 will reveal that there is no significant difference between the levels of highly educated workers in Uruguay compared to the levels in other South American countries. The data uses the proportion of tertiary students in math, science and engineering as a proxy and does not indicate that the human expertise in IT technologies is superior to its neighbors. Furthermore, in contrast to Israel, there is a complete lack of a vibrant venture capital community in Uruguay.
Although the government has provided matching funds to develop a high-tech incubator managed in partnership between a well-known private university and the government’s Scientific Research
Laboratory, the size of this fund is very small and it is still in early stages of its development.
Given that banking loans are prohibitively expensive for the entrepreneurial community, most entrepreneurs make their ends meet by broadening their customer focus and providing software to all kinds of different customers. Lack of outside sources of funding eventually constrains the development of the vast majority of software companies into achieving regional scale.
Clearly, the development of Uruguay’s vibrant IT industry cannot be equated to the models that were successful in Ireland or Israel. Even though the software industry in Uruguay soon became a national emblem, governmental support for it was practically non existent during the years of most spectacular growth. It was not until 1999 when the Uruguayan government actively intervened to support the industry. At this time, the software industry was declared one of national interest, and a plan with long term objectives to make Uruguay a technological hub was

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IT POTENTIAL established. However, the only practical effects that these measures had on the industry were the exoneration of local taxes (IRIC) and of the added value tax (VAT) for software exports. These effects, moreover, were largely a consequence of the lobbing capacity of CUTI. Added to this lack of government involvement to encourage the local software industry, the Uruguayan State
Owned Enterprises (SOEs) seemed to systematically discriminate local software industry through legal demands that only foreign companies could provide 1 .
Therefore, the success of Uruguay’s software industry was due to endemic reasons by a growing demand for customized software. The financial sector was one of the main seeds to generate this demand. Historically it has been one of the most stable service industries in the country and had an inherent demand for customized software products in Spanish language. Banks such as ABN
AMRO played a major role in the boom of Uruguayan software exports, since the software systems implemented by local companies in Uruguayan branches were also implemented in the branches of other South American countries. The quality of the software was highly praised and this served to boost the brand image of Uruguayan software in other nations, which would greatly benefit the export sector.
In the late 1980s and early 1990s, the Uruguayan government resorted to privatization of its major state-owned enterprises and enactment of the FTZ regime to open the market to outside investors and reduce the size of its bloated state. Because the privatization efforts have been halfhearted and have faced enormous resistance from the population (mainly from strong worker unions within the SOEs), the Uruguayan government focused on creating FTZ as its major effort to attract FDI.
In drafting these set of attributes in a coherent and decisive way, major differences emerged early on between Costa Rica and Uruguay. Like in any business, a great idea must be accompanied by
1) a clear and consistent strategy, 2) an execution plan to deliver results and 3) a long-term mindset to persist through roadblocks in pursuit of success. Costa Rica performed better than
Uruguay in each of these three levels.
C1) Devising a coherent strategy: Costa Rica’s CINDE vs. Uruguay’s void leadership

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Inspired by the success of Ireland’s Investment Development Agency that had been promoting
FDI flows into Ireland since the 1970’s, Costa Rica devised a winning strategy for its FTZ regime. Convinced that the governance of the FTZs should not be subject to the whims of the government that happened to be in power at any given time, the Costa Rican government took no chances and created an independent, private, non-profit agency to assist foreign investors in establishing their operations in Costa Rica, Costa Rican Investment Board (CINDE) 4 .
Uruguay, on the other hand, enacted the emergence of FTZ in its territory but failed to devise a strategy that would manage those FTZ in a coherent and productive manner. As if expecting
FTZs to proliferate all over the country solely by changing the laws, the Uruguayan government created a weak FTZ governing board led by public officers who were named not by their own professional merits but by appointment of the president. As of 1995 there were 40 official agencies with a say in promoting investment in Uruguay, 18 of which can be considered directly involved in investment activities.
5
Unlike CINDE which managed the growth of its FTZs based on supply and demand factors, the
Uruguayan government employed arbitrary decision-making in allocating FTZ to private bidders and set vague guidelines regarding the activities that should be pursued in each FTZ. Thus, of the
8 FTZ in Uruguay, only one under private management –Zonamerica – has succeeded in developing a competitive FTZ.
C2) The Execution Plan: selling FTZ to the world: Costa Rica’s “clusters” versus Uruguay’s
“silos”
In a globalized and highly competitive world where MNCs (Multi-national corporations) are aggressively lured into many different parts of the developing world, marketing a country’s FTZ regime becomes ever more relevant. Realizing this, CINDE approached its selling efforts in a very smart way. Rather than diluting efforts and giving the wrong signals to MNCs, CINDE selectively promoted Costa Rica as a competitive investment site in three major sectors: medical devices, electronics and service.
Anchored by early adopters like Intel in electronics and Abbot Laboratories in the medical device industry, CINDE used these leading firms as a marketing tool to sell Costa Rica to other firms in
4 Costa Rican Investment Board (www.cinde.or.cr)
5 UNCTAD, World Bank, 1995 report

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IT POTENTIAL the same sectors. This marketing technique is supported by the clusters theory in which firms benefit from the externalities of being close to other firms in the same sector following best practices.
Uruguay lacked an execution plan for its FTZ regime. Each FTZ developed independently of each other in silos. Far from clustering the FTZ development around companies in the same industry, each FTZ competed for the attention of MNCs and there was no single overarching plan to ensure that FDI would benefit the country as a whole.
In the absence of a general FTZ plan for the country, Zonamerica has recently put the cluster theory in action and is now targeting MNCs in the call center, software and biotechnology sectors. It provides ample clustering benefits to firms in each of these industries. For instance, after successfully attracting the Indian software giant Tata Consultancy Services to develop its
South American headquarters in Zonamerica, it is now marketing Tata’s presence to attract other software giants. The recent entry of Ireland’s Trintech, proves that the clustering plan is working.
This FTZ policy also affected the software industry in Uruguay. Multinational companies such us
India’s Tata Consultancy Services and Ireland’s Trintech have chosen Uruguay’s FTZs as the core for operations in Latin America. Attracted by Uruguay’s high education levels, savvy high tech employees and high standards of living, these companies have helped put the software industry on the radar screen of the international software industry.
However, unlike Costa Rica which has given CINDE the teeth to promote each FTZ within Costa
Rica by working in conjunction with the administrators of each independent FTZ, the Uruguayan government has failed to generate the mechanisms and the institutions to execute export-led growth through the FTZ regime. Zonamerica’s success is due to its managers’ unquestionable skills in promoting their FTZ, but the poor development of the other FTZs exposes the lack of a clear execution plan by the government.
C3) Long-term mentality: Costa Rica’s broad mentality vs. Uruguay’s short-term mentality
The benefit of structuring the FTZ regime under a centralized, apolitical agent such as CINDE, ensures the long-term autonomy of the FTZ regime. Due to the time lag between the establishment of a FTZ regime and the economic benefits accruing to society, the lack of shortterm economic impact from FTZ puts pressure on governments to justify the regime. Thus, in

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Uruguay, the government has granted FTZ exploitation rights to several private bidders based on short-term economic pressures rather than based on the robustness of that agent’s proposal. The lack of justification for those FTZ areas has backfired against the FTZ regime, and now each area competes against each other for MNCs much like competing against FTZ from other countries.
In contrast, CINDE has granted FTZ rights in a sensitive way, so as to maximize employment and other benefits to the Costa Rican society. In addition, the political independence of CINDE has allowed them to sustain initial periods of slow growth and shielded them from short-term pressures to provide liquidity to the Costa Rican economy.
CINDE’s success in selling the country to foreign investors has generated FDI average inflows of
US$525 million in 1998-2002, which represents 3 percent of GDP, a high level by Latin
American standards. As a result, the World Bank has placed Costa Rica among the top twenty developing countries in the amount of FDI it has attracted. It must also be mentioned that the
Costa Rican government has actively encouraged the formation of linkages between foreign firms and domestic firms which includes, for example, the latter offering IT-related services to those
MNCs based in the FTZ. These linkages may indeed tell a significant part of the success story.
A) COMPARATIVE ADVANTAGES
Given that none of the three countries described above help to fully illustrate the comparative advantages of the Uruguayan software industry, it must be that Uruguay has some clear and distinguishable characteristics. The following chapter is dedicated to digging deeper into these possible sources of competitiveness of the Uruguayan software sector.

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Figure 1 illustrates the macro-level advantages of Uruguay that have fostered the development of a vibrant community of entrepreneurs in the software industry.
Stable political tradition
Entry door to
South Cone
Social mission of the state
Welfare state –
No social unrest
Capital flows from South
America
Merchandise flows through
Montevideo
Universal education
Financial services Hub
Services development
Investment in infrastructure
State owned companies
High standards of living
ISP nodes investing
High internet penetration
Availability of scientists and engineers
Government interventionism
Source: Alfaro et al: Software in Uruguay Report, 2004
Distinguishing characteristics of Uruguay such as its stable institutions, strategic geographic location and universal and free education promoted by socially-oriented governments created the development of a robust financial center, which in turn spurred the entrepreneurial spirit within the highly educated society to develop software applications customized to those financial institutions. The low capital requirements to start a software business and the inspirational value of successful role models (such as the case of Genexus which will be covered later) convinced would-be entrepreneurs that the space to be in is software.
However, Uruguay presents several macro-level challenges that it needs to address in order to continue the healthy growth of its software industry. Although the population’s education level is very high, there are very few university graduates each year (only 850 computer engineers graduate per year). Moreover, the impact of the recent financial crisis has been of such magnitude that the country is experiencing a brain drain of very highly educated and young people accepting better-paying jobs abroad.

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B) INDUSTRY STRUCTURE
A closer look at the IT industry’s structure reveals several key features. As Figure 2 (below) shows, the IT industry is divided into four segments: software development, software consulting, internet and database services and hardware services. The first two account for more than 90% of
Uruguayan IT exports through a multitude of firms, especially in the software consulting segment.
Figure 2: The IT industry makeup
Software development
Software consulting services
Internet and database services Hardware
Custom made software
(for multinational corporations)
Financial services software consulting
(Banking and Credit cards)
Custom made software
(for multinational corporations), installation and maintenance
Internet hosting
Database management outsourcing
New hardware
Repair and refurbishment
Development software
(tools for developers)
Development software
(tools for developers), technical support
Memory/backup services
Packaged application software for SMEs
Custom software solutions for SMEs
Management software for
SMEs (accounting and other tools), installation and maintenance
Software consulting for
SMEs (database management, etc), installation, maintenance
Source: CUTI, 2002 and Alfaro et al, 2004.
The main conclusion of this diagram shows that Uruguay’s software industry is dominated by a large network of small and medium sized companies. For instance, there are more than 600 companies in the software consulting segment. Most of these are small, with only one employee or less than $200K in sales. This could imply that the entry barriers in the industry are low, a sign that the industry could possible not be mature and that building long-term sustainable advantage could be hard. However, a closer look reveals that a large number of software companies target customers abroad (mostly in Argentina and Brazil).
The SME’s focus on external markets responds to the lack of a domestic software market in which to focus on, but it definitely helps promote the Uruguay software brand abroad. Moreover,

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CUTI helps to foster this growth by promoting treks into Chile, Argentina and other markets where it bundles software companies that target different niche markets and do not compete against each other. Uruguayan software entrepreneurs have realized that collaborative efforts are a preferred strategy for all the parties involved. They need each other to share best practices and to climb the learning curve as opposed to creating no impact on an individual level.
C) A LOOK AT WHAT THE FUTURE MIGHT BRING
The following firm-level case studies highlight that Uruguay not only can attract the leading software companies around the world, but also that it has sufficient local talent to make it big in the international software market.
Tata Consultancy Services recently decided to launch its headquarters for Latin America in
Uruguay. TCS analyzed the region's most prominent information technology markets such as
Costa Rica, Chile, Brazil, or Argentina, and based on the comparative advantages described above, the Indian firm settled on Uruguay, endowing the tiny Southern country with 500 new, well paid jobs and a US$30 million investment. TCS in Uruguay is already operating as an offshore center for US and European customers.
In an interview with Gabriel Rozman, TCS’s Managing Director for Latin America, Rozman acknowledged that in choosing Uruguay as its preferred location, they settled on the following advantages:

High degree of education in English and Portuguese language skills

The existence of a software cluster to pool talent from and ensure positive results immediately

High political stability

Good place to live (Montevideo is the safest city in Latin America)

Willingness of the government to negotiate (Rozman was struck by the sensitivity of the government to make sure TCS had everything they needed)

Software copyright laws are in place and the government has good enforcing mechanisms

Zonamerica is a very comfortable location to work in, they have the best telecommunication infrastructure and are well connected to the world
However, Rozman also called the attention on some disadvantages that could threaten Uruguay’s development of an internationally powerful outsourcing cluster:

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
Uruguay is not in the radar screen for US or European outsourcing targets

The productivity level and English language skills of Uruguayan programmers is good but not as robust as Indian programmers
Trintech , a leading Irish company of secure payment, acquired local credit card secure payment company, Sursoft by investing $10M.
Why acquiring Sursoft?

Important expertise in secure payment

Access to Latin-American markets

Talented workforce

Current portfolio of local and global financial services clients
Local powershouse, Genexus is a business software developer, since 1988 has created a broad range of products such as relational databases, applications, CASE (Computer Aided Software
Engineering) and artificial intelligence for business solutions. Genexus started providing database services for financial institutions and it now has over 4,500 clients worldwide, offices all over
Latin America, United States, Asia and a worldwide distribution network. Genexus has become a role model for not only the software community in Uruguay, but also the economy at large.
Genexus’ founders have proven to Uruguayans that it is possible to build a multinational company out of Uruguay. Their strategy to building international success has been to offer not only its specific software but also those applications of related companies in Uruguay. Thus, it promotes the brand name of Uruguay abroad and it helps scale the otherwise tiny companies out of Uruguay.
4) STRATEGY RECOMMENDATIONS TO POLICY MAKERS IN URUGUAY
In crafting an FDI strategy that leads to increased local employment, the government, along with private organizations such as CUTI, should:

Adopt the lessons from strategic promotion agencies such as IDA and CINDE to promote those foreign investments that make sense in the context of local employment, and that present the best opportunity to build links with the domestic private sector

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 Work with Zonamerica, much like IDA and CINDE’s cluster developments, to help attract foreign investors such as TCS, which help brand Uruguay as a major software hub

Lobby its MERCOSUR partners to allow FTZ to export into the member nations free of custom levies. This will also require further analysis, as the basis of any such lobbying must rest on the premise that benefits will accrue to Uruguay’s MERCOSUR partners

Develop a venture capital community to support Uruguayan software entrepreneurs abroad, much like Israel did.
Argentina abandoned its convertibility plan that pegged the Peso to the US$ in the year 2001.
After the devaluation, the economy moved from being in a situation of large unemployment and current account deficit in the context of a deep recession to a current account surplus and less unemployment increasing demand and GDP by 9% in 2003. The country has been able to grow again and elect a stable government in President Kirschner. Macroeconomic stability is the goal of this government. After crisis and recession in 2000 the authorities have been able to stabilize the currency, implement social programs and slowly lead the recovery of employment, productivity and growth.
The government is committed to generating jobs and specially to stimulate exports in agriculture, tourism and services. After a 4 year recession and a deep financial and political crisis, Argentina seems more in the road of productivity and growth. Still, the country faces many challenges such as paying back its external debt, renegotiating privatization contracts and reducing unemployment and social unrest.
Figure 2: Key Macroeconomic Indicators of Argentina
GDP
Unemployment
2001
-4.4% -10.9%
18%
2002
18.8%
2003
8.4%
14.5%
Current Account ($BN) -4
Interest Rates (ST Interbank rate) 60%
CP Inflation (avg)
9.6
53%
-1.1% 25.9%
6.3
19%
13.4%

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Exchange Rate
Poverty (% of Pop)
Source: EIU 2004 Argentina Report
0.99 3.06
57%
2.90
54%
Argentina’s IT spending in year 2003 was $2 billion 6 or 0.7% of their GDP (US$ basis). In 2003
Argentina exported $180 million of software applications mostly to the US and to the Latin-
American market. The IT labor force in Argentina constitutes 25,000 IT professionals that work in US and Argentinean based IT services companies. During its economic growth period (1990-
1998) Argentina attracted various U.S and European IT and technology companies to establish local offices to develop commercialize and provide a broad range of IT services to major national and international corporations in the banking, telecom, energy, health care, government, consumer goods and agribusiness sector. Large software multinationals such as IBM, Microsoft,
SAP, HP Compaq, Novell, Indra, ITT, HP, Datastream in addition to telecom equipment providers such as Sun Microsystems, ECI telecom, Nortel, Motorola, and Ericsson established their MERCOSUR operations in Buenos Aires and obtained large contracts from recently privatized utility companies and from a growing IT, telecom, software applications and internet consumer market. It is important to note that the growth that the software-export sector experienced was in a disorganized fashion. Most of the companies rely on their own competencies to succeed without being part of a broader IT strategy defined by the government or supported by the private sector. It is crucial for Argentina to embark in a comprehensive strategy that promotes the development of IT clusters and FTZ looking at the successful cases of
Costa Rica and Israel and drawing on the positive elements of Uruguay’s software for export case. It is also key to promote an emerging entrepreneurial group with access to venture capital,
IT export-promotion incentives and strong IP regulation and enforcement.
A) Labor Force
The economic environment of the early and mid 1990’s (before the 1998 economic recession) and the presence of three large technology universities fostered the development of a small but highly prepared IT labor force. Argentina’s telecom companies (Telefónica and Telecom) invested heavily in fiber-optic networks, satellite communications and expanded vastly their voice and data transmission installed capacity around major urban centers. The cluster of national and
6 US Department of Commerce, Export IT Argentina Report, April 2002.

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IT POTENTIAL foreign technology companies benefited from these investments and propelled the creation of a technically prepared and competitive IT labor force. Education investments in Argentina have been the highest in Latin America from 1960’s to 1990’s as a percentage of GDP (10%), with
Uruguay the lowest illiteracy rate of 3%, generating a well prepared human capital that has tremendous economic potential if provided with capital (FDI, FTZ and VC), opportunities, a supportive legal framework (tax incentives), IP rights reinforcement, and a more vibrant business environment.
B) Competitiveness
The case for Argentina in the global IT and outsourcing market is better understood by looking at
Argentina’s performance within the Latin American context, such as the successful case of Costa
Rica and Uruguay. Argentina and Uruguay have a better trained IT labor force compared to other
South American countries, based on its strong public education system, competitive technical universities and the rapid development of its IT infrastructure. Argentina’s source of competitiveness is based on two key areas: low-cost player and market-niche player . Compared to India, Israel or Ireland, Argentina’s software exports are much lower reaching just $180 million. Still, the country has the potential to position itself as a player in specific market niches were it has developed a strong expertise and exploit its actual low cost advantages (postdevaluation).
C) Low cost player strategy
Currency devaluation and high unemployment (16%) put pressures in the economy to reduce wages and make Argentina’s labor force cheaper compared with other key Latin American competitors (in FDI, IT exports and outsourcing potential) like Mexico, Brazil and Costa Rica. IT wages were reduced in average between 100%-200% in real dollars terms. As an example, an IT programmer with five years of experience and a university degree today earns a monthly wage of
$1000-$1500, before the devaluation it used to earn a monthly wage ranging $2000-$2500. This particular situation propelled the creation of call-centers and other basic outsourcing services taking advantage of depressed wages, oversupply of skilled labor and a heavily depreciated and undervalued currency. The IT programming sector has a strong potential to take advantage of this short term economic situation to attract software R&D investments and establish a larger software industry for export. Argentina is currently exporting $180 million 7 in software mainly through 10-
7 Carlos Palloti Interview, President Datastream Argentina, President of CESSE Argentina’s IT
Association.

URUGUAY AND A
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IT POTENTIAL
20 innovative companies that have grown locally and organically with equity investments from partners and angel investors. Key Argentinean companies that have penetrated the US market with software exports and established offices in the US:

Tecnobox (e-learning)

Evolution (software and internet content management)

Core Technologies (Security software, Boston based sales, R&D Buenos Aires)

Fuego Technologies (Business Process Management Systems, Texas based)

Soft Lab (Oil Management/production software)

Idea Factory (software factoring)
The internal market has a demand of US$2billion in IT services composed of important players such as IBM, SAP, Microsoft, People Soft and approximately 150 local small companies that are exporting in a very small scale to neighboring countries and servicing the larger players and the government.
D) Challenges
We consider that the low-cost economic advantage that Argentina enjoys at this point is only sustainable for the next 3-5 years. Early-stage software companies looking to break-even and mobile R&D software development centers from large corporations can see the short term costbenefit of establishing operations during this timeframe. Still and very importantly wage disparity is unsustainable in the long term given Argentina’s positive economic recovery in 2003 and 2004 and the tendency of currency appreciation in the mid-term . Wages will tend to catch-up in the future with those of more developed nations making IT labor less competitive from a cost stand point. Therefore, after analyzing the dynamics of the Argentinean economy and the IT sector, our proposal focuses on Argentina becoming a Market Niche Player and compete on providing high quality IT applications, specific industry expertise solutions and innovation-based products. The government should strategically create a FTZ much like Uruguay but blending it with the Porter’s based cluster development experience of Costa Rica.

URUGUAY AND A
RGENTINA ’ S
IT POTENTIAL
Figure 4: Software Development Strategy Map: Player type, competitiveness drivers,
competitiveness level
3) ARGENTINA’S STRATEGY TO COMPETE IN THE GLOBAL IT INDUSTRY
A) Market niche player strategy
Argentina can not compete with India and China based on a low-cost strategy. These countries have a larger IT labor force and their cost structure is and will continue to be more competitive.
India plays on a larger scale and it is in a more advance stage of BPO. Argentina should become a strong market-niche player and position itself as a knowledge based/industry expert, highly competitive player in specific market segments. The key focus of its strategy should leverage on the following key core competencies:

Strong industry expertise in specific markets : Agribusiness, Spanish-content development, oil production services, health care services, education and entertainment services.

Small but highly qualified IT force : 25,000 programmers that have build up their experience and knowledge at the largest US IT corporations in Argentina. This labor force has been exposed and trained by US corporation’s IT standards, programming languages, adopting similar IT and business practices, and developing cultural

URUGUAY AND A
RGENTINA ’ S
IT POTENTIAL similarities. At the macro level, exploit the fact that it has the largest proportion of university graduates compared to the rest of Latin America.

Developed telecom and IT infrastructure : Telecom investment in Argentina during the
1990’s surpassed the $15 billions as a result of its privatizations. The country has a large installed voice and data transmission capacity and fiber optics network around major cities (Buenos Aires, La Plata, Cordoba) as well as hosting, storage and data centers. This technological network has not been fully exploited and is an important productivity factor to enhance IT services for offshoring companies.

Lower costs for programmers, designers and manufacturing (although as we have noted this advantage it is unsustainable in the long term)

Internal market for IT services of US$ 2 Billion. Compared to Costa Rica, Uruguay and
Israel Argentina has a larger internal IT market that nourishes in-house development as a previous step for export or outsourcing of IT services.

Creative and innovative entrepreneurial spirit applied to marketing, entertainment, and content development.
Key niche markets for software development
The following markets are a fundamental part of Argentina’s economy, where it has developed strong expertise from the business and IT side.
Agribusiness 8 : Argentina is the third largest exporter of agricultural products in the world. The recent economic boom and high commodity prices increased dramatically capital intensive agriculture and revived a sophisticated farming and meat products sector that has developed IT applications for specific industry segments including:
Commodity trading - Software connecting brokers and traders on real time with the Chicago futures market.
Cattle and meat products traceability – Chips inserted in cattle (developed in Argentina) and software tracking system for meat products worldwide (control of origin in animals, vegetables), which is an international requirement for FOB exports into EU and US.
Biotechnology – Disease monitoring software (Hoof-and-mouth, Mad cow disease)
Agrotechnology – IT equipment for agro-management, irrigation systems, etc
8 Carlos Palloti Interview, President Datastream Argentina, President Argentinean IT Association

URUGUAY AND A
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IT POTENTIAL
Spanish content development: Argentina has been the leader in internet-content development during the internet bubble in Latin America and Spain. It is worth noting that Buenos Aires had the highest internet start-ups in Latin America during the internet fever. Companies like
Yupi.com El Sitio.com and the auction site deremate.com became public and were the most popular in the large Spanish speaking market (480 million people, 60 million internet users).
The US Hispanic market has 35 million people and is widely consider as an untapped business potential for large multinationals. Hispanics are the fastest growing minority in the US and by
2050 there will be a quarter of the US population, using Spanish as their first language. Content development for internet and software applications tailored (culturally) for this group is a key strategic area for Argentina given its strong expertise in Spanish education, consumer psychology, communication, programming (web and software development), creativity, entertainment and innovation. Potential clients include: local government (counties), government agencies (education, justice, social security, defense), web searchers, health care providers,
Microsoft, Linux, insurance companies, e-commerce sites, etc.
Health Care –
Argentina’s private health care sector AFJP modernized the health care system during the 1990’s. Mismanagement in spending in the public sector propelled the development of
IT management systems to control overspending within the private and public health sector. Key software applications areas are: imaging diagnostic, hospital budget management, insurance, lab, pharmaceutical, logistics management.
4) RECOMMENDATIONS AND CHALLENGES FOR THE DEVELOPMENT OF THE
IT SECTOR IN ARGENTINA

FDI promotion, Renegotiating contracts with privatized utility companies to clear out the way for new FDI in infrastructure and energy.

Create an independent non-profit FDI agency that promotes directly the development of
IT clusters and FTZ.

Foment the Development of Venture Capital industry. Accelerate the development of ideas into products and products into companies, relying more in the role of VC, PE and incubators.

URUGUAY AND A
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IT POTENTIAL

Property rights enforcement, piracy reduction. Sallstrom consulting says that a 10% reduction in the piracy rate will add US$ 2 billion to the Argentinean economy 9

Complete enactment of IT property right laws in Congress. This will reduce IT taxes for local and foreign investments and stimulate public spending in IT and R&D.
 Establishment of a FTZ in Buenos Aires, emulating Uruguay’s positive takeaways and
Costa Rica’s cluster development.

Develop IT clusters around key industries focusing on being a market niche player in content development, financial sector, agribusiness, health care and oil.

Elimination of taxing over imported IT services and equipment.
The analysis of the software industries in Uruguay and Argentina shed light towards the importance of a coordinated and clear mission statement and strategy execution by a central agency in selling the outsourcing potential to the world. Uruguay and Argentina’s software markets have developed throughout the 1990’s despite their respective governments who have failed to develop a clear marketing strategy to promote the local IT industry to the world.
Although Uruguay has achieved some success by means of the FTZ regime, the strategy that proved most effective is catering to niche IT markets in the developed world and coordinating the expansion through a non-governmental institution rather than the government itself. A market niche approach in software development for outsourcing and exporting is key to compete and capitalize on profitable market segments in the US, Spain and the rest of Latin America.
However, in order to take advantage of their highly educated IT-related labor forces, the governments along both sides of the River Plate need to take a more active role alongside private institutions to develop a venture capital community, protect IP and attract investments. As we have seen, Uruguay and Argentina’s SMEs have reached a growth ceiling based on their organic growth strategies and they now need to leverage their experience with outside capital in order to become global companies. Successful cases such as Genexus in Uruguay and Core Technologies in Argentina are an exception to the rule because they have managed to scale their organic-based growth into becoming multinational corporations. However, there needs to be a more coordinated strategy to promote other local stars into becoming global companies. Should these countries develop such a VC alternative, they would then become outsourcing hubs to be reckoned with on
9 Sallstrom, Damuth The role of the software industry in Argentina’s growth. Special report for CESSI,
Aregentina’s IT association.

URUGUAY AND A
RGENTINA ’ S
IT POTENTIAL a global scale. Only then will we be able to compare the software industries of Uruguay and
Argentina with that of India.

URUGUAY AND A
RGENTINA ’ S
IT POTENTIAL
[1] CUTI report, March 2003, What the IT industry Indexes in Uruguay Say, (Qué indicant los datos de la industria uruguaya de tecnologías de la información) (In Spanish)
[2] Alfaro, Chanda, Kalemli-Ozcan and Sayek. FDI and Economic Growth: The Role of Local
Financial Markets.
[3] del Castillo, Graciana. Promotion of Export-Oriented Foreign Direct Investment in Uruguay,
Study Prepared for the Inter-American Development Bank. July 2003
[4] Legal and Foreign Investment Advisors, www.uruguayinvest.com
[5] The ABC of free-trade zones in Uruguay
[6] Economist Intelligence Unit. Uruguay Country Profile
[7] UNCTAD, World Bank, 1995 report
[8] Costa Rican Investment Board ( www.cinde.or.cr
)
[9] British Broadcasting Corporation: Uruguay Country Profile
[10] Sallstrom, Damuth The role of the software industry in Argentina’s growth. Special report for CESSI, Argentina’s IT association.
[11] US Department of Commerce, Export IT Argentina Report, April 2002.
[12] Economic Intelligence Unit Argentina Country Report 2004

ARGENTINA AND URUGUAY’S OUTSOURCING POTENTIAL
Exhibit 1: Uruguay’s Key Macroeconomic indicators
Economic structure: Annual indicators
1999 a
2000 a
2001 a
2002 a
GDP at market prices (Ps bn)
237.1 243 247.2 262
20.9
-2.8
20.1
-1.4
18.6
-3.4
12.3
-11
GDP (US$ bn)
Real GDP growth
(%)
Consumer price inflation (av; %)
Population (m)
Exports of goods fob (US$ m)
Imports of goods fob (US$ m)
Current-account balance (US$ m)
Foreign-exchange reserves excl gold
(US$ m)
5.6
3.3
2,290.60
3,187.20
-507.6
2,081.20
4.8
3.3
2,383.80
3,311.10
-566.2
2,478.90
4.3
3.4
2,139.40
2,914.70
-487.7
3,097.10
14
3.4
b
1,933.10
1,872.90
261.7
769.1
9.7 10.7
b
Total external debt
(US$ bn)
7.5 8.2
Debt-service ratio, paid (%)
24.8 29.6
Exchange rate (av)
Ps:US$
11.34 12.1 a
Actual. b
Economist Intelligence Unit estimates.
Source: Economist Intelligence Unit
38.2
13.32
83.0
b
21.26
10.7
b
34.6
b
28.21
2003 a
315.4
11.2
2.5
19.4
3.4
b
2,273.00
2,092.00
76.0
b
2,083.20

ARGENTINA AND URUGUAY’S OUTSOURCING POTENTIAL
Exhibit 2: Uruguay’s Key Commercial Indicators

ARGENTINA AND URUGUAY’S OUTSOURCING POTENTIAL
Exhibit 3. IT Sales in the internal Uruguay software market
$107.25M
Hardware
35%
$87.52M
Services
30%
$16.4M
Applications
6%
$39.7M
Licenses
13%
$46.13M
Consulting
16%
Source: CUTI surveys (extracted from reference 1)
Exhibit 4. IT Exports of Uruguay (US$ millions)
25
20
15
10
5
0
50
45
40
35
30
Applications Services Licenses
Source: CUTI surveys (extracted from reference 1)
Exhibit 5: IT Exports as a % of Total Uruguayan Exports
Consulting
1999
2000
2001

ARGENTINA AND URUGUAY’S OUTSOURCING POTENTIAL
Total IT exports, thousands of USD
CAGR %*
28
60,00
0
76,80
0
3
79,40
0
5
83,56
0
68
4,50
0 n.a. n.a. n.a. n.a.
IT exports,
% of total exports
51
1.4
%
2.0
%
1
2.0
%
20
2.5
%
53
0.2
%
199
3 n.a. n.a. n.a. n.a.
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
Source:
*
CUTI, Central Bank of Uruguay, Alfaro et al.
Exhibit 5. Technology Indicators across selected Latin American countries, Israel and
Ireland
R&D
Expenditures
Uruguay
Internet Users
(per people)
1000
119
(% GDP)
0.3
Tertiary Students in science, math and eng
(% of total students)
24
Argentina
Brazil
Paraguay
Chile
Ireland
100.8
46.6
10.6
201.4
233.1
0.4
0.8
N/A
0.5
1.2
30
23
22
43
30
Israel 276.6 3.6 N/A