The role of state regulation in the development of Ukraine's IT sector: optimisation strategies and policy recommendations

Abstract

The study is focused on the role of state regulation in the development of Ukraine's IT sector, as well as on optimisation strategies and policy recommendations. It explains the problem of inconsistent regulatory impact on the IT sector growth, which is worsened by bureaucratic barriers, compliance costs and policy instability. The research uses panel data collected for 2020-2024 to determine the impact of tax incentives, financial assistance, compliance costs, regulatory quality, digital infrastructure and educational investment on IT sector growth and efficiency. The paper uses the results of fixed effects, random effects, and generalised method of moments econometric models, and the results are robust with respect to sensitivity analysis using diagnostic tests to investigate the relationship between state regulation and IT sector performance. This suggests that improved tax incentives and financial support create better environment for IT sector growth, while reduced compliance costs and better quality of regulation help to achieve better operational efficiency. Furthermore, investments in digital infrastructure as well as education enhance innovation and productivity. It has been shown that the growth of the IT sector was influenced by the change of tax incentives from UAH 2.5 billion in 2020 to UAH 4.5 billion in 2024, which led to an increase in the annual growth rate from 7.2% to 11.2%. Financial support also grew from UAH 1.2 billion up to UAH 2.3 billion, thus maintaining innovation and expansion of startups. Moreover, compliance costs decreased from 4.5% to 3.6%, operational efficiency increased, and the Regulation Quality Index rose from 3.2 to 4.3 and helped to create a more friendly business environment. Digital infrastructure and IT education, which simply grew from UAH 0.8 billion to UAH 1.2 billion, were another incentive for innovation capacity and productivity The paper also discusses how stable policy enables long-term strategic planning from an investor's perspective and how it builds the investor's confidence. Based on the conclusions of this study, policy recommendations are formulated on three evidence-based dimensions: optimisation of tax incentives, increase in financial support, and reduction of compliance costs; while on the other hand investing in digital infrastructure and IT education. The paper concludes that Ukraine's IT sector has a sustainable growth and global competitiveness, however, such a rate is possible provided there is a stable policy environment and strategic state regulation. This study also contributes to academic discourse on state regulation in digital economy through widening the scope of applied research and suggests further practical approaches for the industry stakeholders and state policy makers.