400 INTERNATIONAL CONFERENCE ON EURASIAN ECONOMIES 2011 Software Production in Kyrgyzstan: Potential Source of Economic Growth Rahat Sabyrbekov (American University of Central Asia, Kyrgyzstan) Abstract In recent years, software development in the Kyrgyz Republic demonstrated 60-70% growth rate. Kyrgyz software products are exported to Central Asian neighbors and to the Western countries such as Italy, Australia and Holland. With the highest Internet penetration in the region and pool of qualified staff Kyrgyzstan has real chances to sustain the growth rate of the industry. Moreover, the cheap labor creates comparative advantage for local software producers. The break-up the Soviet Union lead to bankruptcies of traditional industries in the Kyrgyz Republic and thousands of highly qualified engineers were left unemployed. Simultaneously since independence Kyrgyz government implemented number of reforms to encourage development of Information and Communication Technologies which lead to the establishment of ICT infrastructure in the region. The paper analyzes the development trend of the software production industry in the Kyrgyz Republic. We will also overview international experience as in the leading software producers as well as in neighboring countries. The study also builds projections for the next decade and draw on certain policy implications. In addition the paper will provide policy recommendations. The data used is from by the Association on IT companies, questionnaires, National Statistics Committee, Word Bank and Asian Development Bank. JEL codes: F1, O34, O38 1 Introduction Innovative economy, knowledge economy, information communication technology sector are probably most popular topics discussed in mass media and among politicians. There are tons of literature about structural changes in the economy and shift to the knowledge economy in new modern world. The software industry is one of the main examples of knowledge economy, as the value of what a software company produces is almost entirely in the knowledge embodied in its products and services. However there are very few papers found on software production in the post-Soviet countries. It is a fast growing industry producing high value services for its customers. The unique feature of the IT sector is indeed free access into the market and almost zero transportation costs due to Internet penetration. Dynamic ICT growth in Kyrgyzstan along with positive or neutral government polices have established ground for software production. One of the distinct features is that 80% of the cost is labor, which is variable cost and labor of Kyrgyz software developers are lowest among main competitors. 2 Software industry in developing countries and Kyrgyzstan The global software market had total revenue of $198 billion in 2010 with compound growth of 5.4% between 2006 and 2010. The performance of the market is forecast to accelerate with anticipation that the market in 2015 will have value of $259.1 billion (Global Software Highlights, 2010). Major suppliers and consumers of packaged software are in the developed countries.