. "2 Offshoring and Engineering: The Knowledge Base and Issues." The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press, 2008.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications
2 Offshoring and Engineering: The Knowledge Base and Issues
Engineering has been defined as “the application of scientific and mathematical principles to practical ends, such as the design, manufacture, and operation of efficient and economical structures, machines, processes, and systems … (and) … the profession of or the work performed by an engineer” (Pickett et al., 2000). The National Academy of Engineering (NAE) identifies engineering as a key factor in our economic well-being, health, and quality of life (NAE, 2004). The overall importance of engineering is apparent in NAE’s list of “Great Engineering Achievements of the 20th Century,” which includes electrification, water supply and purification, the automobile, and the Internet.1Table 2-1 provides an overview of the engineering profession in terms of demographics (e.g., gender, ethnicity, and proportion of foreign born) and other indicators (e.g., number of engineers and average salaries).
In spite of the benefits of engineering to society, the profession is still “under-examined, under-scrutinized, and poorly understood” (Morgan, 2006). In fact, the available data are not sufficiently detailed to provide a clear understanding of the boundaries, composition, and dynamics of engineering. One difficulty is that engineering is a “porous profession,” that is, a significant percentage of the individuals who receive engineering degrees ultimately pursue careers in non-engineering or non-technical fields. At the same time, some individuals who do not have engineering degrees hold jobs with “engineer” in the title.
Thus it is important to keep in mind that engineers are not a homogeneous group, and a study of the offshoring of engineering requires taking into consideration the wide range of engineering capabilities and tasks, both within and between industries and locations. These differences are considered in the commissioned papers where data are available. Another difficulty is that engineering is divided into disciplines (Table 2-2), only some of which require licensing or certification to practice.
UNCERTAINTIES ABOUT THE FUTURE
Today the engineering profession in the United States faces many challenges and uncertainties. One long-term concern is whether engineering will continue to attract sufficient numbers of young people, particularly U.S. citizens, to enter the profession. The overall number of engineering bachelor’s degrees granted in the United States, which had been dropping, has gone up in recent years but appears to have reached a peak (Heckel, 2006).2Figure 2-1 shows the long-term trend. It is important to note that, although the number of engineering bachelor’s degrees has declined somewhat over the past 20 years and the number of engineering and computer science bachelor’s degrees combined has increased by about 20 percent, the total number of bachelor’s degrees increased by more than 40 percent. Thus overall technical degrees have been less popular than other, nontechnical majors.
A number of reasons have been put forward to explain the long-term decline in interest among U.S. students in engineering, a trend that predates the emergence of offshoring. The reasons include slower salary growth than in other occupations that have less difficult academic requirements
Analysts are fairly certain that the number of engineering degrees has reached a peak because the overall number of degrees has also peaked, reflecting the decrease in the number of 18 to 24 year-olds.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications
2
Offshoring and Engineering: The Knowledge Base and Issues
Engineering has been defined as “the application of scientific and mathematical principles to practical ends, such as the design, manufacture, and operation of efficient and economical structures, machines, processes, and systems … (and) … the profession of or the work performed by an engineer” (Pickett et al., 2000). The National Academy of Engineering (NAE) identifies engineering as a key factor in our economic well-being, health, and quality of life (NAE, 2004). The overall importance of engineering is apparent in NAE’s list of “Great Engineering Achievements of the 20th Century,” which includes electrification, water supply and purification, the automobile, and the Internet.1 Table 2-1 provides an overview of the engineering profession in terms of demographics (e.g., gender, ethnicity, and proportion of foreign born) and other indicators (e.g., number of engineers and average salaries).
In spite of the benefits of engineering to society, the profession is still “under-examined, under-scrutinized, and poorly understood” (Morgan, 2006). In fact, the available data are not sufficiently detailed to provide a clear understanding of the boundaries, composition, and dynamics of engineering. One difficulty is that engineering is a “porous profession,” that is, a significant percentage of the individuals who receive engineering degrees ultimately pursue careers in non-engineering or non-technical fields. At the same time, some individuals who do not have engineering degrees hold jobs with “engineer” in the title.
Thus it is important to keep in mind that engineers are not a homogeneous group, and a study of the offshoring of engineering requires taking into consideration the wide range of engineering capabilities and tasks, both within and between industries and locations. These differences are considered in the commissioned papers where data are available. Another difficulty is that engineering is divided into disciplines (Table 2-2), only some of which require licensing or certification to practice.
UNCERTAINTIES ABOUT THE FUTURE
Today the engineering profession in the United States faces many challenges and uncertainties. One long-term concern is whether engineering will continue to attract sufficient numbers of young people, particularly U.S. citizens, to enter the profession. The overall number of engineering bachelor’s degrees granted in the United States, which had been dropping, has gone up in recent years but appears to have reached a peak (Heckel, 2006).2 Figure 2-1 shows the long-term trend. It is important to note that, although the number of engineering bachelor’s degrees has declined somewhat over the past 20 years and the number of engineering and computer science bachelor’s degrees combined has increased by about 20 percent, the total number of bachelor’s degrees increased by more than 40 percent. Thus overall technical degrees have been less popular than other, nontechnical majors.
A number of reasons have been put forward to explain the long-term decline in interest among U.S. students in engineering, a trend that predates the emergence of offshoring. The reasons include slower salary growth than in other occupations that have less difficult academic requirements
1
See http://www.nationalacademies.org/greatachievements/index.html.
2
Analysts are fairly certain that the number of engineering degrees has reached a peak because the overall number of degrees has also peaked, reflecting the decrease in the number of 18 to 24 year-olds.
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TABLE 2-1 A Snapshot of Metrics and Trends in U.S. Engineering
Metric
Data
Trends/Comments
Total U.S. workforce (2003)
138 million
37% increase since 1983
Total science, technology, engineering, math (STEM) workforce (2003)
7.5 million
70% increase since 1983
Total engineering workforce (2003)
2 million
25% increase since 1983; about 1.4 % of the total workforce, compared with roughly 1.6 % in 1983
Proportion of engineering workforce (2003) that is
Female
10%
Up from 6% in 1983
African American
3%
Hispanic
7%
Asian
10%
Proportion of the engineering workforce that is foreign-born (2002)
16%
Increase of 2% from 1994.
Average annual salary for engineers (2005)
$63,526
Represents 1.8 times the average salary of the entire U.S. workforce
Engineering degrees awarded in the United States (2004)
Bachelor’s
64,675
Down from 72,670 in 1983; the bachelor’s number has tended to fluctuate
Master’s
33,872
Up from 18,886 in 1983, reflecting a fairly steady increase
Doctorates
5,776
Up from 2,781 in 1983, this figure has also increased steadily
Projected increase in the engineering workforce between 2004 and 2014
13%
Note that this is a projection, not a certainty. The 13% projected increase in engineering is roughly the same as that projected for the overall U.S. workforce
Note: This presentation is meant to provide a broad overview and therefore does not delve into the subtleties involved in measuring the engineering workforce. Abt Associates (2004) provides a good discussion of the various issues and uncertainties. Perhaps most important, these figures for the engineering workforce DO NOT include “mathematical and computer science professions,” which means that the population of interest to this study is somewhat larger than is reflected in the chart.
Source: Adapted from Commission on Professionals in Science and Technology, 2004–2007. Drawn from various tables and charts.
(e.g., business and finance); negative stereotypes of engineers; and, possibly, the perception that offshoring and other aspects of globalization portend a decline in engineering in the United States. All of these factors combined could raise significant barriers to students choosing to major in engineering.
Unfortunately, data to counter these perceptions are difficult to come by. Data on salaries, for instance, are ambiguous. On the one hand, starting salaries for new engineers with bachelor’s degrees are significantly higher than starting salaries in many other fields (NAE, 2007). On the other hand, salaries for Ph.D. holders in engineering are lower than, and have not grown as quickly as, salaries of other professionals, such as doctors and lawyers (Freeman, 2005a). Thus students might be justified in believing that the extra work and effort required to earn an advanced degree in engineering might not be as well rewarded financially as advanced degrees in other fields.
A related concern is the increasing reliance of the U.S. engineering enterprise on students from abroad, particularly at the graduate level. Much more than half of engineering doctorates and roughly 40 percent of engineering master’s degrees from U.S. institutions are awarded to foreign nationals (Heckel, 2006). Traditionally, many of these graduates have remained in the United States to build their careers and have contributed substantially to U.S.-based innovation (COSEPUP, 2005).
With the number of U.S. citizens entering engineering programs perhaps in decline (perhaps a cyclical decline, but perhaps a longer term trend), a drop in the number of foreign students entering these programs, or a decrease in the number of foreign engineers who stay in the United States after earning degrees, could affect the future overall size and capability of the U.S. engineering workforce. In 2003, 26 percent of engineering degree holders in the United States were foreign-born (22 percent of bachelor’s degree holders, 38 percent of master’s degree holders, and 51 percent of doctoral degree holders).
Despite the stringent U.S. immigration policies since the 9/11 attacks, current data on foreign enrollments and “stay rates” indicate that the United States is still attracting foreign students who pursue degrees in engineering and launch
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TABLE 2-2 Engineering Workforce by Discipline and Other Relevant Occupations, 2006
Discipline
Number of Engineers
Aerospace
87,000
Agricultural
3,000
Biomedical
14,000
Chemical
29,000
Civil
237,000
Computer hardware
74,000
Electrical and electronics
280,000
Environmental
51,000
Industrial, including health/safety
223,000
Marine engineers/naval architects
8,000
Materials
21,000
Mechanical
218,000
Mining/geological
7,000
Nuclear
15,000
Petroleum
15,000
Engineering managers
184,000
Other
156,000
Total
1,622,000
Other Relevant Occupations
Number Employed
Computer Scientists and Systems Analysts
678,000
Computer Software Engineers
802,000
Total Engineering and Other Relevant
3,102,000
Notes: Rounded to the nearest thousand. The total for engineers is somewhat lower than that contained in Table 2-1, reflecting different years and methods of compilation.
Source: Bureau of Labor Statistics. May 2006 National Occupational Employment and Wage Estimates. Accessed November 1, 2007. Available online at http://www.bls.gov/oes/current/oes_nat.htm.
their careers here (Council of Graduate Schools, 2006). For example, in 2003, one-year stay rates were estimated at 71 percent, five-year stay rates at 67 percent, and ten-year stay rates at 58 percent for foreign students (temporary visa holders) who received science and engineering doctoral degrees from U.S. institutions (Finn, 2005). However, some analysts believe that a growing number of U.S.-educated foreign scientists and engineers are returning to their home countries after graduation (Heenan, 2005; Newman, 2006).
The attractiveness of engineering as a profession in the United States depends on it being considered a satisfying, stable, well compensated career, relative to other professions. However, the current picture and outlook appear to be mixed (Morgan, 2006). In the early years of this decade, unemployment in electrical engineering and fields related to information-technology (IT) industries reached historic highs (Harrison, 2005). The factors contributing to the rise in unemployment included the bursting of the dot-com bubble, rapid changes in technology, and increasing globalization, perhaps including offshoring. Although the unemployment rate for electrical engineers dropped back to its normal (in historic terms) low level between 2003 and 2005, this might reflect slow growth or even shrinkage in the profession, rather than a true recovery.3
High levels of unemployment and slow salary growth from 2002 to 2004 and longer term changes in engineering work have raised persistent concerns about the future of the profession. For example, Jones and Oberst (2003) described engineering employment as becoming “more volatile with each decade,” as careers characterized by upward mobility and advancement are replaced by work patterns that require numerous lateral job shifts. They ascribe the changes to the “commoditization” of engineering work, that is, the breaking down of jobs into highly specific tasks that can be performed by employees, outsourced to contractors, or sent offshore. At the same time, Sperling and others believe that more and more demands are being made of engineers in terms of responsibilities and skills (Sperling, 2006). One can infer from both of these analyses that lifelong learning may well become more important, both for the profession as a whole and for individual engineers.
The important points to keep in mind in this introductory summary are (1) engineering, like other professions and other job categories, is changing; and (2) technological advances and globalization are two of the forces driving this change. Analyses of the industry-specific studies (provided in Part 2 and summarized in Chapter 3) indicate that engineers are being affected by these changes in different ways, depending on engineering discipline, age, access to continuing education, and educational background.
With improvements in the economy, job prospects, and salary growth in 2006 and 2007, engineers today are feeling more upbeat about their careers, more secure in their jobs, and more inclined to recommend engineering as a career choice than they were just a few years ago (Bokorney, 2006). Although these cyclical improvements in employment prospects are encouraging, they may not relieve apprehensions about long-term trends, including offshoring, and their potential implications and risks.
In his description of the relatively new field of networking, Rappaport (this volume) touches on several of the trends and perceptions that underlie anxieties about the future of U.S. engineering. Networking is a field that combines hardware and software aspects of computing and telecommunications. As U.S.-based corporate research has declined in recent years, firms based elsewhere are increasing their activity. Research based at U.S. universities remains strong, but top university graduate programs are increasingly reliant on students from abroad.
3
The Occupational Employment Statistics produced by the Bureau of Labor Statistics cannot be used to compare employment levels in some employment categories, such as electrical engineering, over time, because the survey and statistical techniques used to produce a “snapshot” of employment levels at a particular time have changed over time. Thus results are not always comparable.
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FIGURE 2-1 Bachelor’s degrees in engineering and computer science, 1983–2004. Source: National Science Foundation/Division of Science Resources Statistics; data from Department of Education/National Center for Education Statistics; Integrated Postsecondary Data System Completions Survey.
THE INSTITUTIONAL AND HISTORICAL CONTEXT OF OFFSHORING
The NAE Committee on the Offshoring of Engineering defined “globalization” as the broad, long-standing process whereby national economies and business activities are becoming increasingly integrated and interdependent, mainly through expanded trade, capital flows, and foreign direct investment. “Offshoring” was defined as a more recent phenomenon whereby work is being relocated and diffused across national borders, enabled by advances in communications technology and changes in management practices. A wide range of services work is being offshored, but this workshop and report focus only on engineering.
Ideally, the committee would define offshoring of engineering as engineering work transferred from the United States to other locations, both by outsourcing the work to other organizations and by establishing or expanding subsidiary operations in the offshore destination. In practice, there are several difficulties with this definition. First, based on existing data, it is difficult to track the expansion of overseas jobs and the contraction of U.S.-based jobs in a way that establishes a relationship between them. Second, the expansion in overseas engineering work by firms with extensive U.S. engineering operations is not necessarily accompanied by a corresponding contraction in U.S. engineering activity; in addition, the jobs being created overseas may be qualitatively different from those that might be cut in the United States. Even with much better data, it would be very difficult to tell if offshoring is taking place, as described in the “ideal” definition given above. In the industry-focused papers (Part 2) and elsewhere in the report, expansion of overseas engineering work, both through outsourcing and subsidiaries, is considered evidence of offshoring.
Other factors related to offshoring included in this study are specific business practices (e.g., the international diffusion of corporate research and development [R&D]) that preceded the recent wave of offshoring but have taken new directions since it began, the movement of engineering work as a result of the relocation of manufacturing activities, and “onshoring” (engineering work being moved to the United States from abroad).
One important topic discussed in several of the papers but not a focus of the committee’s summary is the management of offshoring by onshore firms, including effective practices and barriers to success. Clearly, companies in a variety of industries perceive benefits from offshoring. However, it should not be inferred that offshoring is an easy, frictionless process. The Boeing 787 is a recent example of the complications that can arise (Lunsford, 2007). A growing body of literature on the management of offshoring and multinational product-development teams describes barriers to offshoring in an organizational context and ways to overcome them (see, for example, Carmel and Tjia, 2005).
Offshore Sourcing of Engineering Work: India as an Example
In the context of engineering, the definition of offshoring encompasses several distinct phenomena and business practices that have emerged over the past several decades in particular industries. With rapid changes in technology and markets, these phenomena and business practices, which have somewhat different motivations and destination countries or regions, sometimes overlap and blend into the broader trend of the globalization of innovation.
The business models and infrastructure for a wide range of services offshoring, including business-process offshor-
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ing, emerged mostly in the software industry, principally in India. As a context for the discussion of offshoring in specific industries in Chapter 3, we briefly review the historical development of services offshoring and India’s role in that development.
From the time of India’s independence until the early 1990s, the Indian economy was highly regulated and controlled by the government (Dossani and Kenney, this volume). Indian international trade and investment were based on a protectionist, import-substitution philosophy. At the same time, a focus of public policy in India was investing in science and engineering research and higher education, which included the founding and expansion of Indian institutes of technology (IITs) (Murali, 2003). However, the IITs served a relatively small portion of the population, and many graduates continued to go overseas for graduate training. When the Japanese, South Korean, and other Asian economies underwent rapid economic growth fueled by manufacturing for the global market, India was largely cut off from the global economy. Nevertheless, its pool of skilled, English-speaking workers continued to grow.
During the 1970s and 1980s, India developed a small software industry focused on its domestic market (Aspray et al., 2006). The international Indian software industry began with Tata Consultancy Services, a pioneering firm that provided Indian programmers to work at customer sites in the United States. As this kind of activity increased during the 1980s, the Indian government became aware of the value of the software industry and adopted several preferential policies (e.g., exempting export revenue from taxation) that encouraged growth and kept the industry focused on the international market. Cultural, technological, and business factors came together during the late 1980s and 1990s to accelerate the growth of India’s software industry.
Cultural factors included the tendency of educated Indians to become proficient in English. Because of this, India, along with Israel and Ireland, became a destination for the early offshoring of software work for U.S. multinational companies. All three countries offered low labor costs and skilled, English-speaking programmers. Another cultural factor was the presence of Indian-born engineers who had been educated and had worked in the United States (Saxenian, 2006). More than one-quarter of U.S. engineering and technology firms launched between 1995 and 2005 had at least one key founder who was foreign-born, with the largest number from India (Wadhwa et al., 2007).
As India’s software industry grew and its global orientation became more prominent, Indian expatriates actively contributed to the development of new Indian-based companies and the operations of U.S.-based IT companies in India. As a result, the Indian government adopted policies to support the software industry, such as raising the standards for physical infrastructure and opening the economy to global trade. Indian expatriates have increasingly focused their efforts on developing entrepreneurial ventures that combine U.S.-based financing and market acumen with India-based engineering implementation.
Technological factors were also important to offshoring of IT-related work to India. The widespread adoption by the computer industry of the Unix workstation standard and the C programming language in the 1980s enabled the modularization of programming. This made it possible for independent software vendors to use standardized tools to develop programs for a wide range of operating systems and applications. During the 1990s, PCs with X86 microprocessors and Windows operating systems replaced RISC/Unix workstations in programming, and the Internet “provided a platform for networked development of software and software installation, hosting, and maintenance” (Dossani and Kenney, this volume). The availability of widely used word processing, spreadsheets, computer-aided design, and drafting software combined with the Internet to enable remote, distributed approaches to technical work. The point is not that these changes gave India unique advantages, but that technological advances made it possible to undertake a wide range of IT-related work in widely dispersed locations at the same time that the development of India’s institutions and human-resource base made it an attractive location.
Business factors, which have led to the development of new business models in global service industries, also contributed to the offshoring of engineering and other services work to India. For example, Indian companies and the Indian affiliates of multinational corporations were well positioned to undertake much of the necessary software coding and maintenance work in response to the Y2K crisis in the late 1990s (Sturgeon, 2006). This led to the upgrading and expansion of the business infrastructure, which, in turn, led to the expansion of IT-related business-process offshoring.
The contracting of outside firms to manage data-processing functions has a long history. Large multinational consulting companies prominent in this line of business, such as Accenture, EDS, and IBM Global Services, had also been doing Y2K-related work. Many business-process operations required custom-software development, which overlapped with the skills offered by Indian organizations and individual programmers.
As the costs of telecommunications fell and the demand for skilled IT labor in the United States rose during the dotcom boom, India-based activities serving markets in developed countries increased in scale and in scope. Call centers, accounting, finance, human resources, and other business functions became targets for reengineering and offshoring. Indeed, importing services from India has been a key element in the IT-enabled restructuring of services work that some analysts predict will fuel U.S. productivity growth in the coming years (Mann, 2003).
The prospects for growth and development in this type of offshoring are explored in later chapters. For now, it is important to note that “engineering-services outsourcing” is considered by the Indian IT industry as an area for signifi-
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cant growth (NASSCOM, 2006). At the same time, India is aware that it faces significant challenges in sustaining economic growth and becoming a location for increasingly sophisticated engineering work. For example, increasing the capacity and quality of Indian higher education remains an essential, but difficult, task (Agarwal, 2006).
In addition to the offshoring of services, a great deal of overseas engineering involves engineering of manufactured components incorporated into goods sold by U.S.-based companies, and even entire products. In the United States as of 2004, about 40 percent of engineering employment was in the manufacturing sector, even though manufacturing constituted only about 20 percent of the U.S. GDP (BLS, 2005). Semiconductor manufacturing (Brown and Linden, this volume) and PC manufacturing (Dedrick and Kraemer, this volume) are perhaps the best examples (see Chapter 3 for more detail).
In the semiconductor industry, for example, “fabless” companies (mainly based in the United States) contract their manufacturing to “foundry” companies (such as TSMC and UMC, based in Taiwan). In the PC manufacturing industry, much of the detailed engineering of PCs sold by U.S. companies is done in Taiwan, but manufacturing is increasingly concentrated in China. Although this regional specialization in electronics innovation may not fit into the definition of offshoring used by most analysts, the value chains of both industries have been disaggregated over a number of years, a harbinger, perhaps, of offshoring-enabled shifts in business models for many other industries.
Globalization of R&D and Engineering
Foreign direct investment in R&D by multinational companies is a long-standing practice (Mansfield et al., 1979). Several of the papers in this volume describe how some aspects of innovation have historically been internationalized in certain industries, such as automobiles, construction engineering, and pharmaceuticals. In the 1930s, 7 percent of R&D by the largest U.S. and European firms was done outside of their home countries (Cantwell, 1998). From 1965 to 1995, foreign direct investment in R&D increased as multinational business increased. A survey of 32 large multinational companies based in the United States, Europe, and Japan revealed that in 1995 they performed 25.8 percent of their R&D abroad, which partly reflects the strong tendency for Europe-based companies to perform R&D abroad (Kuemmerle, 1999). In 2004, 15 percent of the R&D of U.S.-based multinationals was performed by foreign affiliates (Yorgason, 2007).
In the late 1980s and early 1990s, a large number of investments by Japanese and other foreign companies in R&D in the United States led some to question whether such investment was good or bad for the U.S. research enterprise (NAE, 1996). Concerns were raised that companies based outside the United States might “cherry pick” the results of publicly supported research through acquisitions and incremental investments in university research.
Many academic studies of overseas R&D by multinationals appeared in the 1990s, particularly on the motivations for investment. In a summary of the literature, Kuemmerle (1999) distinguishes between “home-base-exploiting R&D,” in which investing companies want to exploit their existing technological capabilities in the foreign country where they are performing R&D, and “home-base-augmenting R&D,” in which investing companies try to access unique assets in the foreign country by performing R&D there.
For a long time, overseas R&D was largely limited to multinational companies based in the developed world that were establishing or acquiring R&D facilities in other developed countries (Kuemmerle, 1999). In the late 1990s, however, global companies such as Motorola began to establish R&D centers in China and other emerging economies (GUIRR, 1998). Since then, the trend toward R&D investments in emerging economies such as India, China, and Russia has continued (UNCTAD, 2005a,b).
In contrast to other kinds of offshoring described above, some research suggests that the primary motivation for R&D investments in emerging economies is not cost reduction (Thursby and Thursby, 2006). A recent survey of R&D facility-location decisions by multinationals showed that they were influenced by a variety of factors. Interviewees cited the growth potential of the market in the destination country and the quality of R&D personnel as the most important attractors, indicating that both home-base-exploiting and home-base-augmenting motives came into play.
Thus the globalization of R&D is a complex, rapidly changing phenomenon, and the trend of global companies locating R&D facilities in emerging economies is relatively recent. Academic and policy research on these trends is ongoing.4
TRENDS AND PROSPECTS
The phenomenon of offshoring is important not only for engineering, but also for all economic activity in the United States and around the world. In this section, we review some trends and developments in offshoring that have been identified in the recent literature and were discussed at the workshop.
Economics
The National Academy of Public Administration (NAPA) (2006) points out the difficulty of assessing the impacts of
4
Three ongoing National Academies projects worth mentioning in this connection are an examination of the globalization of innovation by the Board on Science, Technology, and Public Policy (STEP), an examination of the innovation systems of India and China, also by STEP, and a study of the changing ecosystem for information technology R&D by the Computer Science and Telecommunications Board.
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offshoring based on international trade and domestic labor markets. Several recent economic analyses have been undertaken to determine the impacts of offshoring on the U.S. economy and the labor force and to project future trends. One point of consensus in these analyses is that available data are not comprehensive or specific enough to determine how many U.S. jobs have been lost as a result of offshoring, the scale of indirect effects on employment that would create new jobs in the United States, and the effects of offshoring on economic growth and incomes. NAPA (2006) cites estimates of annual job losses attributable to offshoring of 15,000 to 192,000. Although this is a large range, even the larger number, 192,000, is small compared with typical quarterly job losses and gains of seven or eight million in the U.S. economy. So, although the statistics do not show evidence of massive U.S. job losses attributable to offshoring in the short term, this does not mean that important longer term shifts will not become apparent in the future.
Data on trade in services are used to measure the actual flow of offshoring work between the United States and major offshoring destinations such as India. However, as the Government Accountability Office (GAO) points out, the Indian figure for exports to the United States is 20 times the U.S. figure for imports from India (see Figure 2-2) (GAO, 2005a). The GAO report lists differences in the way Indian and U.S. data are compiled that could account for this discrepancy. For example, transactions between affiliated entities are not counted in the U.S. data. So, for example, if Accenture is working on an IT consulting project for a U.S. customer, and if Accenture’s operation in India does work under that contract, the work would not be counted as services trade in the U.S. data but would be counted in the Indian data. Another possible source of underreporting of U.S. imports of services might be that many transactions fall below the reporting threshold of the survey or analysis.
Sturgeon (2006) analyzes the limitations of available trade and workforce data and develops a detailed program for addressing the inadequacies in current data. A GAO report that covers similar ground also notes the lack of data in some areas and catalogs potential costs and benefits to the U.S. economy of offshoring (GAO, 2005b).
Some economists argue that the United States will enjoy a significant benefit from offshoring (Mann, 2003). According to one estimate, gains from services offshoring accounted for about 10 percent of U.S. productivity growth from 1992 to 2000 (Amiti and Wei, 2006). Others argue that the United States could suffer a net economic loss in the long term if innovative U.S. industries are undermined by offshoring (Gomory and Baumol, 2001). Freeman (2005a) predicts that the globalization of scientific and engineering talent, of which offshoring is one important aspect, is likely to erode the comparative U.S. advantage in high-technology industries. Given uncertainties in the underlying data and differences in the assumptions of these and other economists, debates over the actual and potential impacts of offshoring are likely to continue.
In a more recent development, analysts have questioned whether U.S. manufacturing output is overstated (Mandel, 2007). If it is, the overstatement could lead to a corresponding overstatement of U.S. productivity growth, meaning that U.S. economic performance in recent years might not be as strong as statistics suggest. If this is true, it would weaken support for the argument that the balance of benefits and
FIGURE 2-2 U.S. software imports from India according to U.S. and Indian statistics, 1998–2004, in billions of dollars. Source: Dossani and Kenney (this volume), based on data from the Bureau of Economic Analysis, U.S. Department of Commerce, and National Association of Software and Services Companies (NASSCOM) of India.
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costs to the United States from globalization has been overwhelmingly positive.
Regardless of whether there are long-term net gains or losses for the U.S. economy as a whole, offshoring raises distributional issues, such as possible exacerbations of income inequality and the costs of job displacement, that are borne disproportionately by particular individuals in certain job categories and regions. Possible ways of addressing the distributional issues, such as extending Trade Adjustment Assistance to people who lose their jobs as a result of international trade, and providing wage insurance, are discussed in Chapter 4.
Other analyses have attempted to predict how offshoring might evolve in the future. For example, Jensen and Kletzer (2006) find that the number of U.S. workers engaged in potentially tradable services industries (i.e., workers whose jobs may be vulnerable to offshoring) is higher than the number of workers in manufacturing industries who are vulnerable to potential trade-related job losses.
Several consulting firms that advise companies on offshoring decisions have also developed estimates and projections of future trends. One analysis, by McKinsey Global Institute (2005), argues that, although the supply of young, college-educated workers employable in offshored services work, including engineering, will continue to expand, the supply is not inexhaustible. They cite several reasons for this. First, the rate at which India and other developing economies can expand their higher education infrastructure is limited. Second, only a fraction of potential workers in the pool of young, college-educated workers in China, India, and other emerging economies is suitable for employment by global companies. Most of the potential labor pool is disqualified because of a lack of language skills, a lack of practical skills due to deficiencies in the educational systems of some countries, or a poor cultural fit (e.g., attitudes toward teamwork and flexible working hours). The implication is that wages for the best qualified workers in destination countries will be extremely competitive, thus reducing the cost advantage of offshoring.
One “big picture question” related to offshoring concerns the long-term impacts of economic volatility. Some have argued that the U.S. economy can tolerate a high level of volatility (or flexibility) in labor and other markets because of its openness to trade and, therefore, can innovate and grow more quickly than other developed economies (Brown et al., 2006). Others point out that in the 1990s large emerging economies in India, China, and Russia approximately doubled the global supply of labor, thus decreasing returns to labor and increasing returns to capital (Freeman, 2005a,b). Rapid globalization that increases real and perceived job insecurity for a large portion of the U.S. workforce, they say, may sow the seeds of its own destruction by fueling voter demands for protection from international competition (Anderson and Gascon, 2007).
Politics and Policies
Trade policy is a perennial issue in U.S. politics, and the policy debates over offshoring represent a continuation of that tradition (e.g., Dorgan, 2006; Mankiw and Swagel, 2006). In recent policy debates, there are clear linkages between offshoring and other aspects of globalization, such as immigration. Even before widespread offshoring, some services workers, particularly IT professionals, had raised concerns about job dislocations and slow wage growth brought on by the availability of skilled immigrants holding H-1B and L-1 visas.
Some prominent analyses explicitly link offshoring with immigration (Hira and Hira, 2005). On the one hand, they say, offshoring can act as a substitute for immigration; by performing work overseas, U.S.-based companies have less need to hire immigrants. On the other hand, immigrant engineers with U.S. corporate experience are a valuable resource for companies that want to launch or expand their offshoring activities. Thus policies must be carefully considered because they can have both positive and negative consequences. For example, policies that attract more skilled immigrants to study science and engineering in U.S. graduate schools could not only increase the supply of talent, but also suppress wages, thereby reducing the incentive for U.S. citizens to pursue science and engineering degrees.
As can be seen from the discussion above, there are numerous gaps in the state of knowledge about broad issues raised by offshoring of engineering. To supplement the existing knowledge base, offshoring in six specific industries was explored in commissioned papers and workshop discussions. The results are summarized in Chapter 3.
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