Best destinations to outsource software development from Japan

Despite the challenging macroeconomic conditions, software outsourcing is a viable choice for those seeking greater business resilience.

Customers and stakeholders now look for digital experiences that lean on the highest development and engineering standards, where quality and speed are uncompromised. In order to keep up with the hectic pace of digitalization, top-tier companies search for viable software outsourcing opportunities. According to a 2022 Deloitte study, 76% of companies outsource their IT functions. High demand shows why software outsourcing is essential for companies operating in different industries, be it automotive, finance, or healthcare. Top technology implementers are more likely to thrive in a digital environment.

In this article, we will discuss several destinations for software development outsourcing where Japanese companies can open up new vistas of business discovery. These places have earned their reputation as hubs for software outsourcing due to their skilled workforce, advanced infrastructure, and favorable business environments. Malaysia, Poland, Ukraine, Germany, and Argentina – here’s a snapshot of what each country brings to the table in terms of software development outsourcing for Japanese enterprises.

Malaysia

Malaysia embodies a viable destination for businesses striving to tap into new competence areas. Despite the worldwide challenging macroeconomic backdrop, Malaysia’s GDP exhibited a consistent upward trajectory in Southeast Asia throughout the year 2022 (see Fig. 1). The Information and Communication Technology (ICT) sector played a pivotal role in the country’s economy in 2022, constituting 5.7% of Malaysia’s Gross Domestic Product (GDP), according to a Statista report. Meanwhile, data from the World Bank indicates that Malaysia’s ICT service exports accounted for 11.3% of its total service exports in 2022.Figure 1. Malaysia showed promising economic growth throughout 2022, the World Bank highlights

The Malaysian government recognizes and supports new opportunities in the tech industry. In 2021, it released the Malaysia Digital Economy Blueprint– a strategy for strengthening the country’s digital economy. One of its primary objectives is to drive digital transformation across various sectors and enhance Malaysia’s competitiveness on the global stage. The program appears to be reaping its rewards. Reuters reported that Malaysia’s digital economy achieved $15.7 billion of investment only in the third quarter of 2022.

When it comes to IT outsourcing, Malaysia provides an extensive talent base and subject matter expertise. In recent years, the country has launched an educational program to promote specialization in science, technology, engineering, and mathematics (STEM) among students. The goal is to achieve a 60% STEM enrollment rate by 2030, and the nation is actively working to reach this target.

Currently, the country is perceived as a major data center hub. According to Arizton, a market research organization, the value of Malaysian data center markets was at $1.06 billion in 2021. Projections indicate that this figure is set to surge to an impressive $1.57 billion by 2027. Last but not least, close geographical proximity and strong diplomatic relations with Japan make Malaysia one of the most attractive software outsourcing destinations for Japanese companies.

Poland

Poland has earned a strong reputation as a reliable business avenue and a magnet for technology firms, a status it has maintained for many years. The country is among the world’s leaders in terms of economic growth: Poland’s GDP has tripled over the past three decades, the World Bank points out. In 2022, the Polish ICT industry expanded to reach a total value of $24.5 billion, equivalent to zł100 billion. This growth represented an increase of more than 11% in comparison with the preceding year, a recent Statista report shows.

And, an upward trajectory is expected to continue in the foreseeable future. The IT service market alone is forecasted to experience consistent annual growth, averaging 5.8% and reaching $4.8 billion in 2027 (in comparison with $3.7 billion in 2022). Software deployment and managed services (in which the market has already gained a value of $950 million) will be the focal points of the country’s technology development, ITwiz reports.

The tech ecosystem in Poland has evolved into a prime destination for businesses and entrepreneurs seeking to harness the opportunities in its vibrant market. In the first quarter of 2022, more than 138,000 IT companies operated nationwide, with over 360,000 tech-savvy specialists working for IT and non-IT organizations. Ekonomia highlights that 27,200 new IT vendors entered the market in 2022, which reflects a similar tendency that prevailed in 2020 and 2021. This consistent performance echoes the resilience of the Polish technology industry amid socio-political challenges in the region.

Global organizations view Poland as a tech critical player and investment arena. In 2022, 435 startups and small enterprises managed to secure zł3.6 billion in funding in the venture capital (VC) market, mirroring the stable performance seen in the previous year. Below is a graph representing the robust business scene of Polish startups that operate in the three dominant areas of SaaS, web applications, and mobile applications, among others:Figure 2. Startup environment, as per the 2022 Polish Startups Report by the Startup Polish Foundation

There is also a great demand for skilled technology professionals across the country, especially in large technology hubs such as Krakow. To meet that need, universities collaborate closely with the business community, offering internships, co-op programs, and opportunities for students to gain real-world experience. In the academic year 2022/2023, the number of first-year students in computer science reached approximately 44,000, a record number that echoes a great interest in this field during the last couple of years.

The comparably stable Polish ICT market, vibrant tech community, an increasing number of IT experts, large startup pool, extensive investment flow, and the growth of the IT service market make Poland a thriving destination for IT outsourcing. Poland exemplifies an environment where mature talent and business-friendly conditions converge to meet the diverse needs of Japanese enterprises.

Ukraine

Despite the large-scale Russian invasion, the IT sector has remained one of the pillars of Ukraine’s economy. Ukrainian IT companies were able to sustain 95% of their contracts even amidst the challenges brought about by the war, the New York Times reports. The overall growth of the IT industry in Ukraine in the last year reached 5.9%.

In 2022, Ukraine witnessed a peak in its export of ICT services that gained a value of $7.6 billion, as reported by the independent think tank, the Better Regulation Delivery Office. According to data from the World Bank, ICT service exports represented 46.7% of the country’s total exports for that year. Notably, the IT industry contributed 3.5% to the country’s GDP in 2022, an increase from 2.7% in 2021. Let’s take a closer look at the evolution of Ukraine’s IT landscape over the last decade in terms of the IT market’s value:Figure 3. The value of IT services export in Ukraine, according to the largest Ukrainian technology community DOU

Over the years, Ukraine has emerged as a major software development provider for a couple of reasons. First, the country offers a vast pool of software development companies and a broad spectrum of consulting services. According to the Ministry of Digital Transformation, Ukraine is home to 2,172 IT enterprises: 1628 product companies and 544 IT service providers. The presence of 87 research and development (R&D) centers within them further contributes to the country’s standing in the tech sector.

Second, global companies are drawn to Ukraine because of its advantageous legal and tax framework, not to mention specialized pockets of talent and tech expertise. Ukraine has taken significant steps to create a business-friendly environment, with a corporate income tax rate of 18% – a competitive rate compared to many other countries. The country has also implemented various incentives, such as exemptions and reductions, to encourage foreign investments.

Technology is one of the sought-after sectors in Ukraine. A record number of students enrolled in programs related to computer science in 2022, with 58,500 students embarking on computer science programs at the university level, signaling a record enrollment in this field. In the same year, more than 309,000 technology specialists worked in the ICT sphere, with Lviv, Kyiv, and Kharkiv serving as prominent technology hubs, the National Institute for Strategic Studies findings say. This surge in student interest and the substantial tech workforce underlines the nation’s position as a resilient IT hub.

Germany

Germany ranks as one of the biggest ICT markets worldwide. The value of the German IT service sector alone amounted to around €45.7 billion in 2022, and the ICT market size amounted to €196.1 billion, marking an approximately €8 billion growth compared to the prior year’s figures. The country’s ICT service exports reached 9.8% in 2022. Here is a closer look at the IT revenue growth in Germany starting from 2019, which illustrates the growth of the IT service market:Figure 4. IT Revenue in Germany counted in billion USD by the U.S. International Trade Administration

Germany’s technology sector has reached a level of maturity that appeals to companies of varying scales and levels of innovation. The Federal Statistical Office’s data reveals that the IT industry in Germany encompasses 94,000 IT companies and a workforce totaling around 1,000,000 employees. This rich business environment entices established global corporations and serves as fertile ground for startups. For instance, in the first half of 2023, 1,300 new startups were founded in the country, according to the German Startup Association. This shows a 16% increase in the number of new companies established within the country compared to recent years. Berlin, Hamburg, and Munich are the leading cities in this entrepreneurial surge.

Germany provides a high-caliber talent pool for international businesses. During the winter semester of 2022/2023, the enrollment count for computer science programs in Germany reached 143,582 students. At the same time, there was a substantial 61% increase in the number of students selecting the IT sector as their major from 2011 to 2021. The country’s commitment to education and its strong emphasis on technology-related fields contribute to the availability of a skilled workforce. This vast and diverse talent pool fuels the country’s technological advancements and embodies a valuable resource for global enterprises.

Argentina

Argentina is considered one of the most prospective IT outsourcing hubs in Latin America. The ICT market’s worth surged to $19.75 billion in 2022, with projections pointing towards a steady growth trajectory in the future. Rising to $42.52 billion by 2027, the market is expected to maintain a compounded annual growth rate (CAGR) of 16.57%. In 2022, ICT service exports accounted for 19% of the country’s economic activity, according to data from the World Bank. Here is a closer look at the country’s development of digital competitiveness starting from 2017 till 2022:Figure 5. After the 2021 downfall, Argentina continues to increase its digital competitiveness, as data from the International Institute for Management Development indicates

The IT industry experienced substantial employment growth over the past couple of years, with an uptick comprising 37.6%. The country has the potential to draw in more than 400,000 additional employees over the next decade. Additionally, the Argentinian government announced that it will support the science and technology sectors by funding ₱500 billion in 2023.

The country has a well-educated and skilled workforce, with a strong emphasis on technology, engineering, and computer science education. Over the years, the number of computer science students in Argentina has increased by 25% and reached 110,000 students in 2020. In addition to this solid educational foundation, a selection of top-notch IT companies operate in the country’s business environment, including IncluIT powered by Avenga, Salesforce, and Baufest, which further contributes to its reputation as a thriving hub for IT innovation and excellence.

Final thoughts

In this rapidly changing digital world, the ability to adapt and respond effectively to unforeseen challenges is a linchpin of success. When it comes to outsourcing, a diversified location portfolio makes businesses gain precisely that. With options spanning Southeast Asia, Europe, and Latin America, Japanese companies can attain a competitive cost advantage. In addition, global collaboration helps prevent the risks of talent shortages and macroeconomic disruptions. It empowers organizations to leverage the unique strengths and capabilities of different regions, and allows people and ideas to mingle on a large scale. If this isn’t a competitive advantage, what else could possibly claim that title?

Delve into uncharted digital transformation avenues and unveil new opportunities with Avenga. Reach out to us to begin your journey.