Attchment J.7 Assisting Moldova’s Competitiveness Champions Selecting Two Further Industries.pdf

ASSISTING MOLDOVA'S

COMPETITIVENESS

CHAMPIONS:

SELECTING

TWO FURTHER

INDUSTRIES

USAID Moldova Competitiveness Project

The USAID Moldova Competitiveness Project 14, Nicolae Iorga str.

MD-2012, Chisinau, Moldova Tel.: (+373) 22 908 280 Fax: (+373) 22 908 290 office@chemonics.md

Ph ot o cr ed it

: D oi na N is to r / P ho to c ap ti on

: S tu dy v is it o f T ec hn ic al

U ni ve rs it y of M ol do va t o th e Ex ce lle nc e

C en te r of U ni ve rs it y fr om B ra so v R om an ia

ATTACHMENT J.7

Kevin Murphy, Martin Webber and Karen Isahakyan J. E. Austin Associates, Inc.

With and for Chemonics and the USAID Moldova Competitiveness Project

July 26th, 2016

This publication was produced for review by the United States Agency for International Development.

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

USAID MOLDOVA COMPETITIVENESS PROJECT

ACKNOWLEDGEMENT

The authors would like to express our deepest appreciation to all those who collaborated in this report.

We would like to acknowledge Doina Nistor, Sergiu Rabii, Diana Lazar and all USAID MCP project staff for their support and collaboration. We would like to express special thanks to representatives of the many Moldovan companies that took time from their busy schedules to meet with us and share their insights on the competitiveness of their industries and the suitability of project assistance. These included companies involved in creative services, precision engineering, furniture, metal manufacturing and automotive supply industries. We would also like to acknowledge with much appreciation the crucial role of the staff of MIEPO, who helped to identify and organize meetings with companies. We would also like to thank international experts whom we consulted including Ifor Ffocs-Williams who advises the creative services industry cluster in New Zealand on the suitability of focusing on an industry with such a diverse set of companies. We would like to thank Dr. Michael Porter of the Harvard Business School Institute for Strategy and Competitiveness whose competitiveness diamond we used among our analytical techniques.

We would like to thank Graeme Harrison of Oxford Economics who helps compile the tourism projections for the World Travel and Tourism Council with whom we analyzed the methodologies and accuracy of current and projected economic impacts of tourism in Moldova. Last but not least, many thanks go to Dr. Sergiu Botezatu, USAID/Moldova, who provided his comments throughout the course of our work.

Photo credit: Racceeva Elena / Phoro caption: Identity of Makers of Moldova, Atelier 99

ACRONYMS

CAGR Compound Annual Growth Rate CEED Competitiveness Enhancement and Enterprise Development (USAID project) CG Computer Graphics CS/CSI Creative Services or Creative Services Industry DC-FTA Deep and Comprehensive Free Trade Agreement EU European Union FEZ Free Economic Zones GDP Gross Domestic Product GoM Government of Moldova ITC International Trade Center, UN World Trade Organization JAA J.E. Austin Associates, Inc.

MCP Moldova Competitiveness Project MDL Moldovan Leu MIEPO Moldova Investment and Export Promotion Organization MoU Memorandum of Understanding NBS National Bureau of Statistics of the Republic of Moldova CIS Commonwealth of Independent States PE Precision Engineering TUM Technical University of Moldova USAID United States Agency for International Development USD US Dollars VAT Value Added Tax

CONTENTS

Acronyms 1 Executive Summary 5 I. Background for this report 9 Objectives and Methodology 9 II. Industry Selection: From Long List to Short List 11

Exhibit 1: Industries Ranked by Turnover in 2014, million lei 13 Exhibit 2: Growth in Sales Ranked by Industry 2010-2014 (CAGR) 14 Exhibit 3: Top exports of products from targeted sectors in 2015, thousand USD 15 Exhibit 4: Employees in Moldovan Industry Sectors 17 Exhibit 5: Top Growth in Employment (net new jobs) in targeted sectors, 2014 / 10 18 Exhibit 6: Top Productive jobs (Annual Sales/ Employee) of targeted sectors, thousand MDL 19 Exhibit 7: Top exports of services from targeted sectors in 2015, thousand USD 20 Exhibit 8: Annual export growth of services from targeted sectors 21 Summary Analysis and Selection of Short Listed Industries 21 Exhibit 9: Summary Table: Automotive-Related, Precision Engineering, Creative Industries, Soft Drinks and Furniture are shown to be important industries for being "short-listed" for further analysis 22

III. Further Competitiveness Analysis of the 5 Short-Listed Industries 23 Revealed Competitiveness Analysis (RCA) 23

IV. Qualitative Analysis of the Five Leading Industries 25 Automotive Parts 25 Beverages - Soft Drinks 25 Furniture 26 Precision Engineering 26 Creative Services Industries 27 Summary on Industry Selection 27

V. Creative Services Industry (CSI) in Details 28 Competitiveness Assessment for Moldovan Creative Industries Cluster 28 Definition and Description 28 Examples of Creative Industries in Moldova 28 Can "Creative Industries" Be Considered as a True Industry Cluster? 29 Importance of Creative Industries 29 Market Trend Analysis: Favorable Trends in the Global and Regional Economic Context 29 Current Situation 29 Survey of Creative industries 30 SWOT Analysis. Creative Industry 30 Porter Diamond. Creative Industries 31

VI. Precision engineering in details 34 Competitiveness Assessment for Moldovan Precision Engineering and Manufacturing Cluster 34 Definition and Description 34 Examples of Precision Engineering and Manufacturing Businesses 34 Importance of Precision Engineering and Manufacturing Businesses 34 Market and Competitiveness Trend Analysis: Favorable Trends in the Global and Regional Economic Context 35 Current Situation 35 SWOT Analysis. Precision Engineering 36 Porter Diamond. Precision Engineering 37 Can Precision Engineering Be Considered as an Industry or Cluster? 38

Conclusion 38 Annex A. Exhibits 39

Exhibit 10: Size of national supply and international demand for all Moldovan products at aggregated "2 digit" level (2015) 39 Exhibit 11: Size, market share and growth (blue) in market share of Moldovan electrical equipment exports in 2015 39 Exhibit 12: Size, market share and improvement in market share for furniture, lighting, signs, prefab buildings (2015) 40 Exhibit 13: Size, market share and growth (blue) in market share of Moldovan machinery export categories in 2015 40 Exhibit 14: Size, market share, attractiveness and growth in market share of Moldovan beverage-related exports 41

ANNEX B. Select Interview Notes and Summary Matrixes 42

The objective of this report was to identify one or two attractive Moldovan industries for support by the USAID funded MCP project using rigorous analytics. The USAID-funded Moldova Competitiveness Project (MCP), implemented by Chemonics, is helping to build competitiveness in four Moldovan industries. MCP has been assisting wine and vine, light manufacturing (textiles, apparel and footwear), tourism and information technology industries to build their competitiveness. Per the MCP project plan, MCP will now choose one or two additional industries.

MCP subcontractor J.E. Austin Associates (JAA) implemented this study by analyzing the best data available and spending six person-weeks interviewing industry representatives. JAA is the US-based small business that introduced competitiveness initiatives to USAID in 1998 and co-authored the World Bank guide called Clusters for Competitiveness which provided a series of competitiveness assessment tools.

The team made a very important clarification early on by defining an industry by its capabilities instead of by its products. The former can be used to produce multiple products. Therefore precision engineering includes a variety of products but relies on similar skills. Likewise creative services cover a variety of export services such as animation, design, advertising and others.

Service industries and service exports were also included in our review. The team look not only at product exports but also at service exports and trends in the service industry. The global economy and most national economies are having larger service industry components so this was an important thing to keep in mind while doing this analysis.

This study began by analyzing 50 product categories to identify a short list of five leading industries for further analysis. This list was developed on the basis of the MCP’s Scope of Work, to exclude industries that were already under assistance, such as IT, light industry (apparel and footwear), wine, and tourism. Agricultural sectors were also excluded as the focus of the project was on non – agricultural sectors. Information for the sector assessments was collected through available reports, offline and online data, government statistical information and more than 60 interviews.

Some industries seemed attractive but were not included in the short list because they are not export-oriented. Construction, for example, had very high turnover and accounts for over 30,000 jobs but it is not export-oriented.

This report presents analysis for industries being assisted as well as new potential industries. The team consciously included industries currently being assisted in the analysis to review their attractiveness relative to new industries. The analysis generally confirmed the wisdom of MCP industry choices to date. Textile and apparel exports account for about US$274M along with employment nearing 20,000 with textiles alone contributing nearly 1,500 jobs in recent years. Tourism-related industries generated over US$209M in export revenues with wine generating nearly another US$100M. Exports of computer services are nearly US$60M and growing rapidly.

The team applied eight quantitative criteria to identify five attractive industries: furniture, soft drinks, automotive supplies, precision engineering and creative industries. Criteria included exports, export growth, employment, employment growth, turnover, growth in turnover, and sales per employee as a proxy for the ability to generate relatively high-paying jobs. This analysis was largely quantitative and yielded a short list of five leading industries for further analysis: furniture, soft drinks, automotive supplies, precision engineering and creative services. The report identifies the leading industries in each criteria area and then provides a summary analysis. The consultants paid special attention to regional trends such as the Deep and Comprehensive Free Trade Area (DC-FTA) agreement which gives Moldova access to EU markets. This has already begun to attract investors in the automotive supply value chain and has

EXECUTIVE

SUMMARY

created demand for certain precision engineering products. Emerging demand from the EU and early signs that investors are coming to Moldova is a good sign of areas for Moldovan competitiveness.

The team then conducted further analysis and conducted extensive interviews with firms from these five industries to determine the suitability of each for project assistance. We used the "self-selection" criteria which focused on how receptive industry leaders were to project assistance. We also examined the needs or gaps and whether MCP was in a position to do something useful to fill them. We took into consideration the potential for contributing to the competitiveness of other industries, if relevant. Finally, special factors were taken into consideration such as impact on youth who might otherwise emigrate, impact on women and the impact on disadvantaged regions.

The automotive supply sector was highly competitive and very attractive and might well be the most competitive emerging industry in the manufacturing sector. The data presented in this report show that this sector is perhaps the most dynamic and competitive, generating new jobs, exports and employment. It is also creating jobs outside of Chisinau in some disadvantaged regions. Firms that currently operate in Moldova supply global brands, such as BMW, Mercedes, Volkswagen and even Japanese firms producing in German. From these criteria, the industry was placed at the top of our list.

However, Moldova's automotive supply industry is characterized by a relatively small number of foreign firms who need less of the kind of help the project can provide. They have their own market linkages already established. They understand their manufacturing processes and standards. And production is concentrated among a relatively small number of foreign companies. They have been able to address workforce training gaps to date. Based on interviews with this sector it was unclear how challenge is to help firms in this industry reorient themselves to higher value products and markets, a potential role for MCP. The industry tends to be product focused rather than simply being used for outsourcing. This will provide some resilience.

For many products, turnover per employee in the PE industry is healthy ranging from 444,000 to 524,000 MDL. This compares favorably to 292,000 MDL for non-precision engineering and 278,000MDL for furniture. The industry is sufficiently attractive as to have motivated both foreign investors and entrepreneurial startups.

Exports are US$58M and the industry employs 5,763 people.

The PE industry has gone through a mild downturn and is open to engaging with MCP and can use help. It lost 754 jobs in the last few years, although those jobs remaining seem more productive. Exports have gone down by 3.1% over legitimate industry cluster. Creative industries in Moldova do self-identify. Those we met do think of themselves as being a part of creative industries.

They would like to work together. And there are some commonalities captured in the definition above. There is usually something unique. The work may involve a computer but computers cannot do the work. Creative work is hard to outsource to computers.

The creative industries can also add value and enhance competitiveness of all other Moldovan industries by contributing to the design of furniture and apparel, or the packaging, branding and advertising of Moldovan wine. This industry also helps Moldova's "brand" internationally. While no good statistics exist, JAA estimated about 10,000 people using a Delphi process through industry experts. Export revenues may not show up in the statistics. Many of the firms interviewed seem to be experiencing good growth.

The creative services industry is growing and is one that could retain talented young people and has been showing signs of promise. The creative services industry has potential for growth as Europeans and Russians outsource these functions to Moldovans already. Moldovans have linguistic skills and are bi-cultural understanding people and cultures in the West as well as those from countries of the former Soviet Union, making them capable of adapting creative products for both sides. Barriers to entry are relatively low. And most importantly, the industry leaders meeting with MCP were enthusiastic about collaborating and identified useful things MCP could do to assist.

Moldova can capitalize on EU demand through projects such as “Creative Europe”3 and move towards more service oriented, high value jobs.

Globally, the proportion of GDP is shifting to services. While agriculture and manufacturing continue to grow in value, most countries as they become more developed have over half the economy in the service industry. This trend will likely continue.

much value-added MCP could provide. While we don’t see a role for MCP to support this sector, we do recommend that USAID, EU or other donors consider providing a workforce training fund available to future investors who are considering investing in Moldova but may be worried about the lack of trained personnel. This would have the triple advantage of benefitting Moldovan workers, ensuring that all training funds went to people guaranteed to have jobs and also influencing potentially indecisive investors to invest in Moldova.

The soft drink industry has high turnover but is similarly concentrated among a few large companies. It was not selected since it is highly concentrated and has not created new jobs. Sales are growing and sales per employee look attractive.

Exports also grew by 3.6% between 2011 and 2015.

However, the industry is characterized by a few large companies and it is unclear what the project could actually do to help the industry that it is not already doing for itself. Furthermore, the industry is fairly capital intensive and generates less than 1,000 jobs.

And there has been almost no growth in jobs in recent years.

The furniture industry generates over US$100M in exports, has been growing modestly and the industry is open to project assistance which could do useful things. With a larger number of smaller companies, the project could provide industry experts, upgrade training, and foster industry-education linkages. Had we been able to recommend three industries we would probably have included furniture. Based on the need to select only one or two industries, we did not include furniture because there are fewer than 5,000 jobs in the industry, employment has actually been declining, and these are basically low-wage jobs in an industry that has relatively low turnover per employee. Prospects for growth also seem modest in the context of the overall growth of European housing and furniture market.

the last few years. Therefore the industry is very open to assistance as it seeks to expand markets, to diversify products and to deploy the engineering skills for which Moldova is well known. The firms interviewed seemed very open to the idea of coming together and working with the project to reposition there industry in global markets. The team met several larger firms that are re-orienting their processes and sales efforts to serve EU markets. The industry is going through a transition period to redeploy its skills to new products and markets where MCP assistance might be particularly helpful.

The team found that many precision engineering products are growing at 20%1. And most importantly, these companies are growing because of exports.

Given the prominence of precision engineering and related products in export growth its employment ranked 8th among selected industries with 5,763 jobs2.

The industry may also help retain Moldovan youth in Moldova as many are attracted to work in the creative services industries.

We therefore recommend engaging PE and CSI industries, applying diagnostic tools, creating strategies and identifying specific strategic and policy initiatives. The team began this process by applying SWOT Analysis and the Porter Diamond.

Next steps will include fielding competitiveness experts and industry experts to engage the industries, do the "cluster mustering," and with them apply diagnostics and identify the most promising initiatives to build the competitiveness of these industries and boost exports and employment. Follow on work should start soon to build in the momentum and interest created by this work to date.

PRECISION ENGINEERING

Precision engineering (PE) was found to be attractive, is open to MCP assistance and the project could do useful things to boost its competitiveness during a time of transition. The industry involves communications equipment, measuring equipment, iron and steel reservoirs metalworking involving heat transformation and a variety of other products. Moldova was an historical exporter of precision engineering products for the Soviet defense industry and many of the skills still exist. As the industry involves many products, it is hard to get accurate estimates at times and the

CREATIVE SERVICES

INDUSTRY (CSI)

Creative services can be defined as those producing tangible economic value-added through conceptual, logical, communication and artistic skills involving creativity. Examples include industrial design, graphic design, architectural design, computer animation, studio video production including commercials, advertising, cultural events, "App" design, creation and invention, website design, social media, event managers, visual artists, trainers, speakers, computer graphics (CG), fashion design, entertainment, music composing, arranging and performance and many other specialties.

If one defines an industry not by its products but by its core capabilities, it becomes clear that "creative industries" can be considered a support by the USAID funded MCP project using rigorous analytics. The USAID-funded Moldova Competitiveness Project (MCP), implemented by Chemonics, is helping to build competitiveness in four Moldovan industries. MCP has been assisting wine and vine, light manufacturing (textiles, apparel and footwear), tourism and information technology industries to build their competitiveness. Per the MCP project plan, MCP will now choose one or two additional industries.

MCP subcontractor J.E. Austin Associates (JAA) implemented this study by analyzing the best data available and spending six person-weeks interviewing industry representatives. JAA is the US-based small business that introduced competitiveness initiatives to USAID in 1998 and co-authored the World Bank guide called Clusters for Competitiveness which provided a series of competitiveness assessment tools.

The team made a very important clarification early on by defining an industry by its capabilities instead of by its products. The former can be used to produce multiple products. Therefore precision engineering includes a variety of products but relies on similar skills. Likewise creative services cover a variety of export services such as animation, design, advertising and others.

Service industries and service exports were also included in our review. The team look not only at product exports but also at service exports and trends in the service industry. The global economy and most national economies are having larger service industry components so this was an important thing to keep in mind while doing this analysis.

This study began by analyzing 50 product categories to identify a short list of five leading industries for further analysis. This list was developed on the basis of the MCP’s Scope of Work, to exclude industries that were already under assistance, such as IT, light industry (apparel and footwear), wine, and tourism. Agricultural sectors were also excluded as the focus of the project was on non – agricultural sectors. Information for the sector assessments was collected through available reports, offline and online data, government statistical information and more than 60 interviews.

Some industries seemed attractive but were not included in the short list because they are not export-oriented. Construction, for example, had very high turnover and accounts for over 30,000 jobs but it is not export-oriented.

This report presents analysis for industries being assisted as well as new potential industries. The team consciously included industries currently being assisted in the analysis to review their attractiveness relative to new industries. The analysis generally confirmed the wisdom of MCP industry choices to date. Textile and apparel exports account for about US$274M along with employment nearing 20,000 with textiles alone contributing nearly 1,500 jobs in recent years. Tourism-related industries generated over US$209M in export revenues with wine generating nearly another US$100M. Exports of computer services are nearly US$60M and growing rapidly.

The team applied eight quantitative criteria to identify five attractive industries: furniture, soft drinks, automotive supplies, precision engineering and creative industries. Criteria included exports, export growth, employment, employment growth, turnover, growth in turnover, and sales per employee as a proxy for the ability to generate relatively high-paying jobs. This analysis was largely quantitative and yielded a short list of five leading industries for further analysis: furniture, soft drinks, automotive supplies, precision engineering and creative services. The report identifies the leading industries in each criteria area and then provides a summary analysis. The consultants paid special attention to regional trends such as the Deep and Comprehensive Free Trade Area (DC-FTA) agreement which gives Moldova access to EU markets. This has already begun to attract investors in the automotive supply value chain and has created demand for certain precision engineering products. Emerging demand from the EU and early signs that investors are coming to Moldova is a good sign of areas for Moldovan competitiveness.

The team then conducted further analysis and conducted extensive interviews with firms from these five industries to determine the suitability of each for project assistance. We used the "self-selection" criteria which focused on how receptive industry leaders were to project assistance. We also examined the needs or gaps and whether MCP was in a position to do something useful to fill them. We took into consideration the potential for contributing to the competitiveness of other industries, if relevant. Finally, special factors were taken into consideration such as impact on youth who might otherwise emigrate, impact on women and the impact on disadvantaged regions.

The automotive supply sector was highly competitive and very attractive and might well be the most competitive emerging industry in the manufacturing sector. The data presented in this report show that this sector is perhaps the most dynamic and competitive, generating new jobs, exports and employment. It is also creating jobs outside of Chisinau in some disadvantaged regions. Firms that currently operate in Moldova supply global brands, such as BMW, Mercedes, Volkswagen and even Japanese firms producing in German. From these criteria, the industry was placed at the top of our list.

However, Moldova's automotive supply industry is characterized by a relatively small number of foreign firms who need less of the kind of help the project can provide. They have their own market linkages already established. They understand their manufacturing processes and standards. And production is concentrated among a relatively small number of foreign companies. They have been able to address workforce training gaps to date. Based on interviews with this sector it was unclear how challenge is to help firms in this industry reorient themselves to higher value products and markets, a potential role for MCP. The industry tends to be product focused rather than simply being used for outsourcing. This will provide some resilience.

For many products, turnover per employee in the PE industry is healthy ranging from 444,000 to 524,000 MDL. This compares favorably to 292,000 MDL for non-precision engineering and 278,000MDL for furniture. The industry is sufficiently attractive as to have motivated both foreign investors and entrepreneurial startups.

Exports are US$58M and the industry employs 5,763 people.

The PE industry has gone through a mild downturn and is open to engaging with MCP and can use help. It lost 754 jobs in the last few years, although those jobs remaining seem more productive. Exports have gone down by 3.1% over legitimate industry cluster. Creative industries in Moldova do self-identify. Those we met do think of themselves as being a part of creative industries.

They would like to work together. And there are some commonalities captured in the definition above. There is usually something unique. The work may involve a computer but computers cannot do the work. Creative work is hard to outsource to computers.

The creative industries can also add value and enhance competitiveness of all other Moldovan industries by contributing to the design of furniture and apparel, or the packaging, branding and advertising of Moldovan wine. This industry also helps Moldova's "brand" internationally. While no good statistics exist, JAA estimated about 10,000 people using a Delphi process through industry experts. Export revenues may not show up in the statistics. Many of the firms interviewed seem to be experiencing good growth.

The creative services industry is growing and is one that could retain talented young people and has been showing signs of promise. The creative services industry has potential for growth as Europeans and Russians outsource these functions to Moldovans already. Moldovans have linguistic skills and are bi-cultural understanding people and cultures in the West as well as those from countries of the former Soviet Union, making them capable of adapting creative products for both sides. Barriers to entry are relatively low. And most importantly, the industry leaders meeting with MCP were enthusiastic about collaborating and identified useful things MCP could do to assist.

Moldova can capitalize on EU demand through projects such as “Creative Europe”3 and move towards more service oriented, high value jobs.

Globally, the proportion of GDP is shifting to services. While agriculture and manufacturing continue to grow in value, most countries as they become more developed have over half the economy in the service industry. This trend will likely continue.

much value-added MCP could provide. While we don’t see a role for MCP to support this sector, we do recommend that USAID, EU or other donors consider providing a workforce training fund available to future investors who are considering investing in Moldova but may be worried about the lack of trained personnel. This would have the triple advantage of benefitting Moldovan workers, ensuring that all training funds went to people guaranteed to have jobs and also influencing potentially indecisive investors to invest in Moldova.

The soft drink industry has high turnover but is similarly concentrated among a few large companies. It was not selected since it is highly concentrated and has not created new jobs. Sales are growing and sales per employee look attractive.

Exports also grew by 3.6% between 2011 and 2015.

However, the industry is characterized by a few large companies and it is unclear what the project could actually do to help the industry that it is not already doing for itself. Furthermore, the industry is fairly capital intensive and generates less than 1,000 jobs.

And there has been almost no growth in jobs in recent years.

The furniture industry generates over US$100M in exports, has been growing modestly and the industry is open to project assistance which could do useful things. With a larger number of smaller companies, the project could provide industry experts, upgrade training, and foster industry-education linkages. Had we been able to recommend three industries we would probably have included furniture. Based on the need to select only one or two industries, we did not include furniture because there are fewer than 5,000 jobs in the industry, employment has actually been declining, and these are basically low-wage jobs in an industry that has relatively low turnover per employee. Prospects for growth also seem modest in the context of the overall growth of European housing and furniture market.

the last few years. Therefore the industry is very open to assistance as it seeks to expand markets, to diversify products and to deploy the engineering skills for which Moldova is well known. The firms interviewed seemed very open to the idea of coming together and working with the project to reposition there industry in global markets. The team met several larger firms that are re-orienting their processes and sales efforts to serve EU markets. The industry is going through a transition period to redeploy its skills to new products and markets where MCP assistance might be particularly helpful.

The team found that many precision engineering products are growing at 20%1. And most importantly, these companies are growing because of exports.

Given the prominence of precision engineering and related products in export growth its employment ranked 8th among selected industries with 5,763 jobs2.

The industry may also help retain Moldovan youth in Moldova as many are attracted to work in the creative services industries.

We therefore recommend engaging PE and CSI industries, applying diagnostic tools, creating strategies and identifying specific strategic and policy initiatives. The team began this process by applying SWOT Analysis and the Porter Diamond.

Next steps will include fielding competitiveness experts and industry experts to engage the industries, do the "cluster mustering," and with them apply diagnostics and identify the most promising initiatives to build the competitiveness of these industries and boost exports and employment. Follow on work should start soon to build in the momentum and interest created by this work to date.

PRECISION ENGINEERING

Precision engineering (PE) was found to be attractive, is open to MCP assistance and the project could do useful things to boost its competitiveness during a time of transition. The industry involves communications equipment, measuring equipment, iron and steel reservoirs metalworking involving heat transformation and a variety of other products. Moldova was an historical exporter of precision engineering products for the Soviet defense industry and many of the skills still exist. As the industry involves many products, it is hard to get accurate estimates at times and the

CREATIVE SERVICES

INDUSTRY (CSI)

Creative services can be defined as those producing tangible economic value-added through conceptual, logical, communication and artistic skills involving creativity. Examples include industrial design, graphic design, architectural design, computer animation, studio video production including commercials, advertising, cultural events, "App" design, creation and invention, website design, social media, event managers, visual artists, trainers, speakers, computer graphics (CG), fashion design, entertainment, music composing, arranging and performance and many other specialties.

If one defines an industry not by its products but by its core capabilities, it becomes clear that support by the USAID funded MCP project using rigorous analytics. The USAID-funded Moldova Competitiveness Project (MCP), implemented by Chemonics, is helping to build competitiveness in four Moldovan industries. MCP has been assisting wine and vine, light manufacturing (textiles, apparel and footwear), tourism and information technology industries to build their competitiveness. Per the MCP project plan, MCP will now choose one or two additional industries.

MCP subcontractor J.E. Austin Associates (JAA) implemented this study by analyzing the best data available and spending six person-weeks interviewing industry representatives. JAA is the US-based small business that introduced competitiveness initiatives to USAID in 1998 and co-authored the World Bank guide called Clusters for Competitiveness which provided a series of competitiveness assessment tools.

The team made a very important clarification early on by defining an industry by its capabilities instead of by its products. The former can be used to produce multiple products. Therefore precision engineering includes a variety of products but relies on similar skills. Likewise creative services cover a variety of export services such as animation, design, advertising and others.

Service industries and service exports were also included in our review. The team look not only at product exports but also at service exports and trends in the service industry. The global economy and most national economies are having larger service industry components so this was an important thing to keep in mind while doing this analysis.

This study began by analyzing 50 product categories to identify a short list of five leading industries for further analysis. This list was developed on the basis of the MCP’s Scope of Work, to exclude industries that were already under assistance, such as IT, light industry (apparel and footwear), wine, and tourism. Agricultural sectors were also excluded as the focus of the project was on non – agricultural sectors. Information for the sector assessments was collected through available reports, offline and online data, government statistical information and more than 60 interviews.

Some industries seemed attractive but were not included in the short list because they are not export-oriented. Construction, for example, had very high turnover and accounts for over 30,000 jobs but it is not export-oriented.

This report presents analysis for industries being assisted as well as new potential industries. The team consciously included industries currently being assisted in the analysis to review their attractiveness relative to new industries. The analysis generally confirmed the wisdom of MCP industry choices to date. Textile and apparel exports account for about US$274M along with employment nearing 20,000 with textiles alone contributing nearly 1,500 jobs in recent years. Tourism-related industries generated over US$209M in export revenues with wine generating nearly another US$100M. Exports of computer services are nearly US$60M and growing rapidly.

The team applied eight quantitative criteria to identify five attractive industries: furniture, soft drinks, automotive supplies, precision engineering and creative industries. Criteria included exports, export growth, employment, employment growth, turnover, growth in turnover, and sales per employee as a proxy for the ability to generate relatively high-paying jobs. This analysis was largely quantitative and yielded a short list of five leading industries for further analysis: furniture, soft drinks, automotive supplies, precision engineering and creative services. The report identifies the leading industries in each criteria area and then provides a summary analysis. The consultants paid special attention to regional trends such as the Deep and Comprehensive Free Trade Area (DC-FTA) agreement which gives Moldova access to EU markets. This has already begun to attract investors in the automotive supply value chain and has created demand for certain precision engineering products. Emerging demand from the EU and early signs that investors are coming to Moldova is a good sign of areas for Moldovan competitiveness.

The team then conducted further analysis and conducted extensive interviews with firms from these five industries to determine the suitability of each for project assistance. We used the "self-selection" criteria which focused on how receptive industry leaders were to project assistance. We also examined the needs or gaps and whether MCP was in a position to do something useful to fill them. We took into consideration the potential for contributing to the competitiveness of other industries, if relevant. Finally, special factors were taken into consideration such as impact on youth who might otherwise emigrate, impact on women and the impact on disadvantaged regions.

The automotive supply sector was highly competitive and very attractive and might well be the most competitive emerging industry in the manufacturing sector. The data presented in this report show that this sector is perhaps the most dynamic and competitive, generating new jobs, exports and employment. It is also creating jobs outside of Chisinau in some disadvantaged regions. Firms that currently operate in Moldova supply global brands, such as BMW, Mercedes, Volkswagen and even Japanese firms producing in German. From these criteria, the industry was placed at the top of our list.

However, Moldova's automotive supply industry is characterized by a relatively small number of foreign firms who need less of the kind of help the project can provide. They have their own market linkages already established. They understand their manufacturing processes and standards. And production is concentrated among a relatively small number of foreign companies. They have been able to address workforce training gaps to date. Based on interviews with this sector it was unclear how challenge is to help firms in this industry reorient themselves to higher value products and markets, a potential role for MCP. The industry tends to be product focused rather than simply being used for outsourcing. This will provide some resilience.

For many products, turnover per employee in the PE industry is healthy ranging from 444,000 to 524,000 MDL. This compares favorably to 292,000 MDL for non-precision engineering and 278,000MDL for furniture. The industry is sufficiently attractive as to have motivated both foreign investors and entrepreneurial startups.

Exports are US$58M and the industry employs 5,763 people.

The PE industry has gone through a mild downturn and is open to engaging with MCP and can use help. It lost 754 jobs in the last few years, although those jobs remaining seem more productive. Exports have gone down by 3.1% over

1. JAA analysis, 2010 to 2014, based on data from the National Bureau of Statistics (NBS)

2. Ibid legitimate industry cluster. Creative industries in Moldova do self-identify. Those we met do think of themselves as being a part of creative industries.

They would like to work together. And there are some commonalities captured in the definition above. There is usually something unique. The work may involve a computer but computers cannot do the work. Creative work is hard to outsource to computers.

The creative industries can also add value and enhance competitiveness of all other Moldovan industries by contributing to the design of furniture and apparel, or the packaging, branding and advertising of Moldovan wine. This industry also helps Moldova's "brand" internationally. While no good statistics exist, JAA estimated about 10,000 people using a Delphi process through industry experts. Export revenues may not show up in the statistics. Many of the firms interviewed seem to be experiencing good growth.

The creative services industry is growing and is one that could retain talented young people and has been showing signs of promise. The creative services industry has potential for growth as Europeans and Russians outsource these functions to Moldovans already. Moldovans have linguistic skills and are bi-cultural understanding people and cultures in the West as well as those from countries of the former Soviet Union, making them capable of adapting creative products for both sides. Barriers to entry are relatively low. And most importantly, the industry leaders meeting with MCP were enthusiastic about collaborating and identified useful things MCP could do to assist.

Moldova can capitalize on EU demand through projects such as “Creative Europe”3 and move towards more service oriented, high value jobs.

Globally, the proportion of GDP is shifting to services. While agriculture and manufacturing continue to grow in value, most countries as they become more developed have over half the economy in the service industry. This trend will likely continue.

much value-added MCP could provide. While we don’t see a role for MCP to support this sector, we do recommend that USAID, EU or other donors consider providing a workforce training fund available to future investors who are considering investing in Moldova but may be worried about the lack of trained personnel. This would have the triple advantage of benefitting Moldovan workers, ensuring that all training funds went to people guaranteed to have jobs and also influencing potentially indecisive investors to invest in Moldova.

The soft drink industry has high turnover but is similarly concentrated among a few large companies. It was not selected since it is highly concentrated and has not created new jobs. Sales are growing and sales per employee look attractive.

Exports also grew by 3.6% between 2011 and 2015.

However, the industry is characterized by a few large companies and it is unclear what the project could actually do to help the industry that it is not already doing for itself. Furthermore, the industry is fairly capital intensive and generates less than 1,000 jobs.

And there has been almost no growth in jobs in recent years.

The furniture industry generates over US$100M in exports, has been growing modestly and the industry is open to project assistance which could do useful things. With a larger number of smaller companies, the project could provide industry experts, upgrade training, and foster industry-education linkages. Had we been able to recommend three industries we would probably have included furniture. Based on the need to select only one or two industries, we did not include furniture because there are fewer than 5,000 jobs in the industry, employment has actually been declining, and these are basically low-wage jobs in an industry that has relatively low turnover per employee. Prospects for growth also seem modest in the context of the overall growth of European housing and furniture market.

the last few years. Therefore the industry is very open to assistance as it seeks to expand markets, to diversify products and to deploy the engineering skills for which Moldova is well known. The firms interviewed seemed very open to the idea of coming together and working with the project to reposition there industry in global markets. The team met several larger firms that are re-orienting their processes and sales efforts to serve EU markets. The industry is going through a transition period to redeploy its skills to new products and markets where MCP assistance might be particularly helpful.

The team found that many precision engineering products are growing at 20%1. And most importantly, these companies are growing because of exports.

Given the prominence of precision engineering and related products in export growth its employment ranked 8th among selected industries with 5,763 jobs2.

The industry may also help retain Moldovan youth in Moldova as many are attracted to work in the creative services industries.

We therefore recommend engaging PE and CSI industries, applying diagnostic tools, creating strategies and identifying specific strategic and policy initiatives. The team began this process by applying SWOT Analysis and the Porter Diamond.

Next steps will include fielding competitiveness experts and industry experts to engage the industries, do the "cluster mustering," and with them apply diagnostics and identify the most promising initiatives to build the competitiveness of these industries and boost exports and employment. Follow on work should start soon to build in the momentum and interest created by this work to date.

PRECISION ENGINEERING

Precision engineering (PE) was found to be attractive, is open to MCP assistance and the project could do useful things to boost its competitiveness during a time of transition. The industry involves communications equipment, measuring equipment, iron and steel reservoirs metalworking involving heat transformation and a variety of other products. Moldova was an historical exporter of precision engineering products for the Soviet defense industry and many of the skills still exist. As the industry involves many products, it is hard to get accurate estimates at times and the

CREATIVE SERVICES

INDUSTRY (CSI)

Creative services can be defined as those producing tangible economic value-added through conceptual, logical, communication and artistic skills involving creativity. Examples include industrial design, graphic design, architectural design, computer animation, studio video production including commercials, advertising, cultural events, "App" design, creation and invention, website design, social media, event managers, visual artists, trainers, speakers, computer graphics (CG), fashion design, entertainment, music composing, arranging and performance and many other specialties.

If one defines an industry not by its products but by its core capabilities, it becomes clear that

Photo credit: Sergiu Rabii / Photo caption: Employees of a metal engineering company explaining the production process, June 13, 2016 support by the USAID funded MCP project using rigorous analytics. The USAID-funded Moldova Competitiveness Project (MCP), implemented by Chemonics, is helping to build competitiveness in four Moldovan industries. MCP has been assisting wine and vine, light manufacturing (textiles, apparel and footwear), tourism and information technology industries to build their competitiveness. Per the MCP project plan, MCP will now choose one or two additional industries.

MCP subcontractor J.E. Austin Associates (JAA) implemented this study by analyzing the best data available and spending six person-weeks interviewing industry representatives. JAA is the US-based small business that introduced competitiveness initiatives to USAID in 1998 and co-authored the World Bank guide called Clusters for Competitiveness which provided a series of competitiveness assessment tools.

The team made a very important clarification early on by defining an industry by its capabilities instead of by its products. The former can be used to produce multiple products. Therefore precision engineering includes a variety of products but relies on similar skills. Likewise creative services cover a variety of export services such as animation, design, advertising and others.

Service industries and service exports were also included in our review. The team look not only at product exports but also at service exports and trends in the service industry. The global economy and most national economies are having larger service industry components so this was an important thing to keep in mind while doing this analysis.

This study began by analyzing 50 product categories to identify a short list of five leading industries for further analysis. This list was developed on the basis of the MCP’s Scope of Work, to exclude industries that were already under assistance, such as IT, light industry (apparel and footwear), wine, and tourism.