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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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2 offshoring and engineering: the Knowledge Base and issues Engineering has been defined as “the application of sci- range of engineering capabilities and tasks, both within entific and mathematical principles to practical ends, such and between industries and locations. These differences are as the design, manufacture, and operation of efficient and considered in the commissioned papers where data are avail- economical structures, machines, processes, and systems able. Another difficulty is that engineering is divided into . . . (and) . . . the profession of or the work performed by an disciplines (Table 2-2), only some of which require licensing engineer” (Pickett et al., 2000). The National Academy of or certification to practice. Engineering (NAE) identifies engineering as a key factor in our economic well-being, health, and quality of life (NAE, UnCertAinties ABoUt the fUtUre 2004). The overall importance of engineering is apparent in NAE’s list of “Great Engineering Achievements of the 20th Today the engineering profession in the United States Century,” which includes electrification, water supply and faces many challenges and uncertainties. One long-term con- purification, the automobile, and the Internet.1 Table 2-1 cern is whether engineering will continue to attract sufficient provides an overview of the engineering profession in terms numbers of young people, particularly U.S. citizens, to enter of demographics (e.g., gender, ethnicity, and proportion of the profession. The overall number of engineering bachelor’s foreign born) and other indicators (e.g., number of engineers degrees granted in the United States, which had been drop- and average salaries). ping, has gone up in recent years but appears to have reached a peak (Heckel, 2006).2 Figure 2-1 shows the long-term In spite of the benefits of engineering to society, the profession is still “under-examined, under-scrutinized, and trend. It is important to note that, although the number of en- poorly understood” (Morgan, 2006). In fact, the available gineering bachelor’s degrees has declined somewhat over the data are not sufficiently detailed to provide a clear under- past 20 years and the number of engineering and computer standing of the boundaries, composition, and dynamics of science bachelor’s degrees combined has increased by about engineering. One difficulty is that engineering is a “porous 20 percent, the total number of bachelor’s degrees increased profession,” that is, a significant percentage of the individu- by more than 40 percent. Thus overall technical degrees have als who receive engineering degrees ultimately pursue ca- been less popular than other, nontechnical majors. reers in non-engineering or non-technical fields. At the same A number of reasons have been put forward to explain time, some individuals who do not have engineering degrees the long-term decline in interest among U.S. students in hold jobs with “engineer” in the title. engineering, a trend that predates the emergence of offshor- Thus it is important to keep in mind that engineers are ing. The reasons include slower salary growth than in other not a homogeneous group, and a study of the offshoring occupations that have less difficult academic requirements of engineering requires taking into consideration the wide 2Analysts are fairly certain that the number of engineering degrees has reached a peak because the overall number of degrees has also peaked, 1 See reflecting the decrease in the number of 18 to 24 year-olds. http://www.nationalacademies.org/greatachievements/index.html. 10

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11 OFFSHORING AND ENGINEERING: THE KNOWLEDGE BASE AND ISSUES 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, 7.5 million 70% increase since 1983 math (STEM) workforce (2003) 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 16% Increase of 2% from 1994. that is foreign-born (2002) Average annual salary for engineers $63,526 Represents 1.8 times the average salary of the entire U.S. workforce (2005) 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 13% Note that this is a projection, not a certainty. The 13% projected increase in engineering is workforce between 2004 and 2014 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 work- force. 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 engi- doctorates and roughly 40 percent of engineering master’s neers; and, possibly, the perception that offshoring and other degrees from U.S. institutions are awarded to foreign nation- aspects of globalization portend a decline in engineering als (Heckel, 2006). Traditionally, many of these graduates in the United States. All of these factors combined could have remained in the United States to build their careers raise significant barriers to students choosing to major in and have contributed substantially to U.S.-based innovation engineering. (COSEPUP, 2005). Unfortunately, data to counter these perceptions are dif- With the number of U.S. citizens entering engineering ficult to come by. Data on salaries, for instance, are ambigu- programs perhaps in decline (perhaps a cyclical decline, but ous. On the one hand, starting salaries for new engineers perhaps a longer term trend), a drop in the number of for- with bachelor’s degrees are significantly higher than starting eign students entering these programs, or a decrease in the salaries in many other fields (NAE, 2007). On the other hand, number of foreign engineers who stay in the United States salaries for Ph.D. holders in engineering are lower than, and after earning degrees, could affect the future overall size and have not grown as quickly as, salaries of other professionals, capability of the U.S. engineering workforce. In 2003, 26 such as doctors and lawyers (Freeman, 2005a). Thus students percent of engineering degree holders in the United States might be justified in believing that the extra work and effort were foreign-born (22 percent of bachelor’s degree holders, required to earn an advanced degree in engineering might 38 percent of master’s degree holders, and 51 percent of not be as well rewarded financially as advanced degrees in doctoral degree holders). other fields. Despite the stringent U.S. immigration policies since the A related concern is the increasing reliance of the U.S. 9/11 attacks, current data on foreign enrollments and “stay engineering enterprise on students from abroad, particularly rates” indicate that the United States is still attracting for- at the graduate level. Much more than half of engineering eign students who pursue degrees in engineering and launch

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1 THE OFFSHORING OF ENGINEERING TABLE 2-2 Engineering Workforce by Discipline and reflect slow growth or even shrinkage in the profession, rather than a true recovery.3 Other Relevant Occupations, 2006 High levels of unemployment and slow salary growth Discipline Number of Engineers from 2002 to 2004 and longer term changes in engineering Aerospace 87,000 work have raised persistent concerns about the future of the Agricultural 3,000 profession. For example, Jones and Oberst (2003) described Biomedical 14,000 engineering employment as becoming “more volatile with Chemical 29,000 each decade,” as careers characterized by upward mobility Civil 237,000 Computer hardware 74,000 and advancement are replaced by work patterns that require Electrical and electronics 280,000 numerous lateral job shifts. They ascribe the changes to the Environmental 51,000 “commoditization” of engineering work, that is, the breaking Industrial, including health/safety 223,000 down of jobs into highly specific tasks that can be performed Marine engineers/naval architects 8,000 by employees, outsourced to contractors, or sent offshore. Materials 21,000 Mechanical 218,000 At the same time, Sperling and others believe that more Mining/geological 7,000 and more demands are being made of engineers in terms of Nuclear 15,000 responsibilities and skills (Sperling, 2006). One can infer Petroleum 15,000 from both of these analyses that lifelong learning may well Engineering managers 184,000 become more important, both for the profession as a whole Other 156,000 Total 1,622,000 and for individual engineers. The important points to keep in mind in this introduc- Other Relevant Occupations Number Employed tory summary are (1) engineering, like other professions Computer Scientists and Systems Analysts 678,000 and other job categories, is changing; and (2) technological Computer Software Engineers 802,000 advances and globalization are two of the forces driving this change. Analyses of the industry-specific studies (provided Total Engineering and Other Relevant 3,102,000 in Part 2 and summarized in Chapter 3) indicate that engi- Notes: Rounded to the nearest thousand. The total for engineers is some- neers are being affected by these changes in different ways, what lower than that contained in Table 2-1, reflecting different years and depending on engineering discipline, age, access to continu- methods of compilation. ing education, and educational background. Source: Bureau of Labor Statistics. May 2006 National Occupational Employment and Wage Estimates. Accessed November 1, 2007. Available With improvements in the economy, job prospects, and online at http://www.bls.gov/oes/current/oes_nat.htm. 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 their careers here (Council of Graduate Schools, 2006). For prospects are encouraging, they may not relieve apprehen- example, in 2003, one-year stay rates were estimated at 71 sions about long-term trends, including offshoring, and their percent, five-year stay rates at 67 percent, and ten-year stay potential implications and risks. rates at 58 percent for foreign students (temporary visa hold- In his description of the relatively new field of network- ers) who received science and engineering doctoral degrees ing, Rappaport (this volume) touches on several of the trends from U.S. institutions (Finn, 2005). However, some analysts and perceptions that underlie anxieties about the future believe that a growing number of U.S.-educated foreign sci- of U.S. engineering. Networking is a field that combines entists and engineers are returning to their home countries hardware and software aspects of computing and telecom- after graduation (Heenan, 2005; Newman, 2006). munications. As U.S.-based corporate research has declined The attractiveness of engineering as a profession in the in recent years, firms based elsewhere are increasing their United States depends on it being considered a satisfying, activity. Research based at U.S. universities remains strong, stable, well compensated career, relative to other profes- but top university graduate programs are increasingly reliant sions. However, the current picture and outlook appear to on students from abroad. 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 3The Occupational Employment Statistics produced by the Bureau of unemployment included the bursting of the dot-com bubble, Labor Statistics cannot be used to compare employment levels in some rapid changes in technology, and increasing globalization, employment categories, such as electrical engineering, over time, because perhaps including offshoring. Although the unemployment the survey and statistical techniques used to produce a “snapshot” of em- rate for electrical engineers dropped back to its normal (in ployment levels at a particular time have changed over time. Thus results historic terms) low level between 2003 and 2005, this might are not always comparable.

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13 OFFSHORING AND ENGINEERING: THE KNOWLEDGE BASE AND ISSUES 140,000 120,000 Engineering plus 100,000 computer science bachelor's degrees 80,000 Degrees Engineering bachelor's 60,000 degrees 40,000 20,000 0 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Year 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 Other factors related to offshoring included in this study ConteXt of offshoring are specific business practices (e.g., the international dif- fusion of corporate research and development [R&D]) that The NAE Committee on the Offshoring of Engineering 3 - 1 Committee Figure preceded the recent wave of offshoring but have taken new defined “globalization” as the broad, long-standing process directions since it began, the movement of engineering work whereby national economies and business activities are be- as a result of the relocation of manufacturing activities, and coming increasingly integrated and interdependent, mainly “onshoring” (engineering work being moved to the United through expanded trade, capital flows, and foreign direct States from abroad). investment. “Offshoring” was defined as a more recent One important topic discussed in several of the papers but phenomenon whereby work is being relocated and diffused not a focus of the committee’s summary is the management across national borders, enabled by advances in communi- of offshoring by onshore firms, including effective practices cations technology and changes in management practices. and barriers to success. Clearly, companies in a variety of A wide range of services work is being offshored, but this industries perceive benefits from offshoring. However, it workshop and report focus only on engineering. should not be inferred that offshoring is an easy, frictionless Ideally, the committee would define offshoring of en- process. The Boeing 787 is a recent example of the compli- gineering as engineering work transferred from the United cations that can arise (Lunsford, 2007). A growing body of States to other locations, both by outsourcing the work to literature on the management of offshoring and multinational other organizations and by establishing or expanding subsid- product-development teams describes barriers to offshoring iary operations in the offshore destination. In practice, there in an organizational context and ways to overcome them (see, are several difficulties with this definition. First, based on for example, Carmel and Tjia, 2005). existing data, it is difficult to track the expansion of overseas jobs and the contraction of U.S.-based jobs in a way that es- offshore sourcing of engineering tablishes a relationship between them. Second, the expansion Work: india as an example in overseas engineering work by firms with extensive U.S. engineering operations is not necessarily accompanied by a In the context of engineering, the definition of offshor- corresponding contraction in U.S. engineering activity; in ing encompasses several distinct phenomena and business addition, the jobs being created overseas may be qualitatively practices that have emerged over the past several decades different from those that might be cut in the United States. in particular industries. With rapid changes in technol- Even with much better data, it would be very difficult to ogy and markets, these phenomena and business practices, tell if offshoring is taking place, as described in the “ideal” which have somewhat different motivations and destination definition given above. In the industry-focused papers (Part countries or regions, sometimes overlap and blend into the 2) and elsewhere in the report, expansion of overseas engi- broader trend of the globalization of innovation. neering work, both through outsourcing and subsidiaries, is The business models and infrastructure for a wide range considered evidence of offshoring. of services offshoring, including business-process offshor-

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14 THE OFFSHORING OF ENGINEERING ing, emerged mostly in the software industry, principally in U.S.-based financing and market acumen with India-based India. As a context for the discussion of offshoring in spe- engineering implementation. cific industries in Chapter 3, we briefly review the historical Technological factors were also important to offshor- development of services offshoring and India’s role in that ing of IT-related work to India. The widespread adoption development. by the computer industry of the Unix workstation standard From the time of India’s independence until the early and the C programming language in the 1980s enabled the 1990s, the Indian economy was highly regulated and modularization of programming. This made it possible for controlled by the government (Dossani and Kenney, this independent software vendors to use standardized tools to volume). Indian international trade and investment were develop programs for a wide range of operating systems and based on a protectionist, import-substitution philosophy. At applications. During the 1990s, PCs with X86 microproces- the same time, a focus of public policy in India was invest- sors and Windows operating systems replaced RISC/Unix ing in science and engineering research and higher educa- workstations in programming, and the Internet “provided a tion, which included the founding and expansion of Indian platform for networked development of software and soft- institutes of technology (IITs) (Murali, 2003). However, ware installation, hosting, and maintenance” (Dossani and the IITs served a relatively small portion of the population, Kenney, this volume). The availability of widely used word and many graduates continued to go overseas for gradu- processing, spreadsheets, computer-aided design, and draft- ate training. When the Japanese, South Korean, and other ing software combined with the Internet to enable remote, Asian economies underwent rapid economic growth fueled distributed approaches to technical work. The point is not by manufacturing for the global market, India was largely that these changes gave India unique advantages, but that cut off from the global economy. Nevertheless, its pool of technological advances made it possible to undertake a wide skilled, English-speaking workers continued to grow. range of IT-related work in widely dispersed locations at the During the 1970s and 1980s, India developed a small soft- same time that the development of India’s institutions and ware industry focused on its domestic market (Aspray et al., human-resource base made it an attractive location. 2006). The international Indian software industry began with Business factors, which have led to the development of Tata Consultancy Services, a pioneering firm that provided new business models in global service industries, also con- Indian programmers to work at customer sites in the United tributed to the offshoring of engineering and other services States. As this kind of activity increased during the 1980s, work to India. For example, Indian companies and the Indian the Indian government became aware of the value of the soft- affiliates of multinational corporations were well positioned ware industry and adopted several preferential policies (e.g., to undertake much of the necessary software coding and exempting export revenue from taxation) that encouraged maintenance work in response to the Y2K crisis in the late growth and kept the industry focused on the international 1990s (Sturgeon, 2006). This led to the upgrading and expan- market. Cultural, technological, and business factors came sion of the business infrastructure, which, in turn, led to the together during the late 1980s and 1990s to accelerate the expansion of IT-related business-process offshoring. growth of India’s software industry. The contracting of outside firms to manage data-processing Cultural factors included the tendency of educated Indians functions has a long history. Large multinational consulting to become proficient in English. Because of this, India, along companies prominent in this line of business, such as Ac- with Israel and Ireland, became a destination for the early centure, EDS, and IBM Global Services, had also been offshoring of software work for U.S. multinational compa- doing Y2K-related work. Many business-process operations nies. All three countries offered low labor costs and skilled, required custom-software development, which overlapped English-speaking programmers. Another cultural factor was with the skills offered by Indian organizations and individual the presence of Indian-born engineers who had been edu- programmers. cated and had worked in the United States (Saxenian, 2006). As the costs of telecommunications fell and the demand More than one-quarter of U.S. engineering and technology for skilled IT labor in the United States rose during the dot- firms launched between 1995 and 2005 had at least one key com boom, India-based activities serving markets in devel- founder who was foreign-born, with the largest number from oped countries increased in scale and in scope. Call centers, India (Wadhwa et al., 2007). accounting, finance, human resources, and other business As India’s software industry grew and its global orienta- functions became targets for reengineering and offshoring. tion became more prominent, Indian expatriates actively Indeed, importing services from India has been a key ele- contributed to the development of new Indian-based compa- ment in the IT-enabled restructuring of services work that nies and the operations of U.S.-based IT companies in India. some analysts predict will fuel U.S. productivity growth in As a result, the Indian government adopted policies to sup- the coming years (Mann, 2003). port the software industry, such as raising the standards for The prospects for growth and development in this type physical infrastructure and opening the economy to global of offshoring are explored in later chapters. For now, it is trade. Indian expatriates have increasingly focused their ef- important to note that “engineering-services outsourcing” is forts on developing entrepreneurial ventures that combine considered by the Indian IT industry as an area for signifi-

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15 OFFSHORING AND ENGINEERING: THE KNOWLEDGE BASE AND ISSUES cant growth (NASSCOM, 2006). At the same time, India publicly supported research through acquisitions and incre- is aware that it faces significant challenges in sustaining mental investments in university research. economic growth and becoming a location for increasingly Many academic studies of overseas R&D by multination- sophisticated engineering work. For example, increasing the als appeared in the 1990s, particularly on the motivations capacity and quality of Indian higher education remains an for investment. In a summary of the literature, Kuemmerle essential, but difficult, task (Agarwal, 2006). (1999) distinguishes between “home-base-exploiting R&D,” In addition to the offshoring of services, a great deal of in which investing companies want to exploit their existing overseas engineering involves engineering of manufactured technological capabilities in the foreign country where they components incorporated into goods sold by U.S.-based are performing R&D, and “home-base-augmenting R&D,” companies, and even entire products. In the United States as in which investing companies try to access unique assets in of 2004, about 40 percent of engineering employment was the foreign country by performing R&D there. in the manufacturing sector, even though manufacturing For a long time, overseas R&D was largely limited to constituted only about 20 percent of the U.S. GDP (BLS, multinational companies based in the developed world 2005). Semiconductor manufacturing (Brown and Linden, that were establishing or acquiring R&D facilities in other this volume) and PC manufacturing (Dedrick and Kraemer, developed countries (Kuemmerle, 1999). In the late 1990s, this volume) are perhaps the best examples (see Chapter 3 however, global companies such as Motorola began to es- for more detail). tablish R&D centers in China and other emerging economies In the semiconductor industry, for example, “fabless” (GUIRR, 1998). Since then, the trend toward R&D invest- companies (mainly based in the United States) contract their ments in emerging economies such as India, China, and manufacturing to “foundry” companies (such as TSMC and Russia has continued (UNCTAD, 2005a,b). UMC, based in Taiwan). In the PC manufacturing industry, In contrast to other kinds of offshoring described above, much of the detailed engineering of PCs sold by U.S. com- some research suggests that the primary motivation for R&D panies is done in Taiwan, but manufacturing is increasingly investments in emerging economies is not cost reduction concentrated in China. Although this regional specialization (Thursby and Thursby, 2006). A recent survey of R&D in electronics innovation may not fit into the definition of facility-location decisions by multinationals showed that offshoring used by most analysts, the value chains of both they were influenced by a variety of factors. Interviewees industries have been disaggregated over a number of years, cited the growth potential of the market in the destination a harbinger, perhaps, of offshoring-enabled shifts in business country and the quality of R&D personnel as the most im- models for many other industries. portant 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 chang- globalization of r&D and engineering ing phenomenon, and the trend of global companies locating Foreign direct investment in R&D by multinational com- R&D facilities in emerging economies is relatively recent. Academic and policy research on these trends is ongoing.4 panies 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 international- trenDs AnD ProsPeCts ized in certain industries, such as automobiles, construction engineering, and pharmaceuticals. In the 1930s, 7 percent The phenomenon of offshoring is important not only for of R&D by the largest U.S. and European firms was done engineering, but also for all economic activity in the United outside of their home countries (Cantwell, 1998). From States and around the world. In this section, we review 1965 to 1995, foreign direct investment in R&D increased some trends and developments in offshoring that have been as multinational business increased. A survey of 32 large identified in the recent literature and were discussed at the multinational companies based in the United States, Europe, workshop. and Japan revealed that in 1995 they performed 25.8 percent of their R&D abroad, which partly reflects the strong ten- economics dency for Europe-based companies to perform R&D abroad (Kuemmerle, 1999). In 2004, 15 percent of the R&D of The National Academy of Public Administration (NAPA) U.S.-based multinationals was performed by foreign affili- (2006) points out the difficulty of assessing the impacts of ates (Yorgason, 2007). In the late 1980s and early 1990s, a large number of 4Three ongoing National Academies projects worth mentioning in this investments by Japanese and other foreign companies in connection are an examination of the globalization of innovation by the R&D in the United States led some to question whether such Board on Science, Technology, and Public Policy (STEP), an examination investment was good or bad for the U.S. research enterprise of the innovation systems of India and China, also by STEP, and a study of (NAE, 1996). Concerns were raised that companies based the changing ecosystem for information technology R&D by the Computer outside the United States might “cherry pick” the results of Science and Telecommunications Board.

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16 THE OFFSHORING OF ENGINEERING offshoring based on international trade and domestic labor be counted in the Indian data. Another possible source of markets. Several recent economic analyses have been un- underreporting of U.S. imports of services might be that dertaken to determine the impacts of offshoring on the U.S. many transactions fall below the reporting threshold of the economy and the labor force and to project future trends. survey or analysis. One point of consensus in these analyses is that available Sturgeon (2006) analyzes the limitations of available trade data are not comprehensive or specific enough to determine and workforce data and develops a detailed program for ad- how many U.S. jobs have been lost as a result of offshoring, dressing the inadequacies in current data. A GAO report that the scale of indirect effects on employment that would create covers similar ground also notes the lack of data in some new jobs in the United States, and the effects of offshoring on areas and catalogs potential costs and benefits to the U.S. economic growth and incomes. NAPA (2006) cites estimates economy of offshoring (GAO, 2005b). of annual job losses attributable to offshoring of 15,000 Some economists argue that the United States will enjoy a to 192,000. Although this is a large range, even the larger significant benefit from offshoring (Mann, 2003). According number, 192,000, is small compared with typical quarterly to one estimate, gains from services offshoring accounted for job losses and gains of seven or eight million in the U.S. about 10 percent of U.S. productivity growth from 1992 to economy. So, although the statistics do not show evidence 2000 (Amiti and Wei, 2006). Others argue that the United of massive U.S. job losses attributable to offshoring in the States could suffer a net economic loss in the long term if in- short term, this does not mean that important longer term novative U.S. industries are undermined by offshoring (Go- shifts will not become apparent in the future. mory and Baumol, 2001). Freeman (2005a) predicts that the Data on trade in services are used to measure the actual globalization of scientific and engineering talent, of which flow of offshoring work between the United States and offshoring is one important aspect, is likely to erode the major offshoring destinations such as India. However, as comparative U.S. advantage in high-technology industries. the Government Accountability Office (GAO) points out, Given uncertainties in the underlying data and differences in the Indian figure for exports to the United States is 20 times the assumptions of these and other economists, debates over the U.S. figure for imports from India (see Figure 2-2) the actual and potential impacts of offshoring are likely to (GAO, 2005a). The GAO report lists differences in the continue. way Indian and U.S. data are compiled that could account In a more recent development, analysts have questioned for this discrepancy. For example, transactions between whether U.S. manufacturing output is overstated (Mandel, affiliated entities are not counted in the U.S. data. So, 2007). If it is, the overstatement could lead to a correspond- for example, if Accenture is working on an IT consulting ing overstatement of U.S. productivity growth, meaning that project for a U.S. customer, and if Accenture’s operation U.S. economic performance in recent years might not be as in India does work under that contract, the work would not strong as statistics suggest. If this is true, it would weaken be counted as services trade in the U.S. data but would support for the argument that the balance of benefits and US Software Imports from India 5 4 U.S. $ billions 3 2 BEA Nasscom 1 0 1998 to 2004 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. Dossani Figure 1

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17 OFFSHORING AND ENGINEERING: THE KNOWLEDGE BASE AND ISSUES Politics and Policies costs to the United States from globalization has been over- whelmingly positive. Trade policy is a perennial issue in U.S. politics, and Regardless of whether there are long-term net gains or the policy debates over offshoring represent a continuation losses for the U.S. economy as a whole, offshoring raises of that tradition (e.g., Dorgan, 2006; Mankiw and Swagel, distributional issues, such as possible exacerbations of in- 2006). In recent policy debates, there are clear linkages come inequality and the costs of job displacement, that are between offshoring and other aspects of globalization, such borne disproportionately by particular individuals in certain as immigration. Even before widespread offshoring, some job categories and regions. Possible ways of addressing the services workers, particularly IT professionals, had raised distributional issues, such as extending Trade Adjustment concerns about job dislocations and slow wage growth Assistance to people who lose their jobs as a result of inter- brought on by the availability of skilled immigrants holding national trade, and providing wage insurance, are discussed H-1B and L-1 visas. in Chapter 4. Some prominent analyses explicitly link offshoring with Other analyses have attempted to predict how offshoring immigration (Hira and Hira, 2005). On the one hand, they might evolve in the future. For example, Jensen and Kletzer say, offshoring can act as a substitute for immigration; by (2006) find that the number of U.S. workers engaged in performing work overseas, U.S.-based companies have potentially tradable services industries (i.e., workers whose less need to hire immigrants. On the other hand, immigrant jobs may be vulnerable to offshoring) is higher than the engineers with U.S. corporate experience are a valuable number of workers in manufacturing industries who are resource for companies that want to launch or expand their vulnerable to potential trade-related job losses. offshoring activities. Thus policies must be carefully con- Several consulting firms that advise companies on off- sidered because they can have both positive and negative shoring decisions have also developed estimates and projec- consequences. For example, policies that attract more skilled tions of future trends. One analysis, by McKinsey Global immigrants to study science and engineering in U.S. gradu- Institute (2005), argues that, although the supply of young, ate schools could not only increase the supply of talent, but college-educated workers employable in offshored services also suppress wages, thereby reducing the incentive for U.S. work, including engineering, will continue to expand, the citizens to pursue science and engineering degrees. supply is not inexhaustible. They cite several reasons for this. As can be seen from the discussion above, there are nu- First, the rate at which India and other developing economies merous gaps in the state of knowledge about broad issues can expand their higher education infrastructure is limited. raised by offshoring of engineering. To supplement the exist- Second, only a fraction of potential workers in the pool of ing knowledge base, offshoring in six specific industries was young, college-educated workers in China, India, and other explored in commissioned papers and workshop discussions. emerging economies is suitable for employment by global The results are summarized in Chapter 3. companies. Most of the potential labor pool is disqualified because of a lack of language skills, a lack of practical skills referenCes due to deficiencies in the educational systems of some coun- tries, or a poor cultural fit (e.g., attitudes toward teamwork Abt Associates. 2004. Engineers in the United States: An Overview of the and flexible working hours). The implication is that wages Profession. Cambridge, Mass.: Abt Associates. Available online at www. for the best qualified workers in destination countries will abtassociates.com/reports/NSF_EWP_report.pdf. Agarwal, P. 2006. Higher Education in India: The Need for Change. Indian be extremely competitive, thus reducing the cost advantage Council for Research on International Economic Relations, New Delhi, of offshoring. India. Working Paper 180. June. One “big picture question” related to offshoring concerns Amiti, M., and S.-J. Wei. 2006. Service Offshoring and Productivity: Evi- the long-term impacts of economic volatility. Some have dence from the United States. Working Paper 11926. Cambridge, Mass.: argued that the U.S. economy can tolerate a high level of National Bureau of Economic Research. Anderson, R.G., and C.S. Gascon. 2007. The Perils of Globalization: volatility (or flexibility) in labor and other markets because Offshoring and Economic Insecurity of the American Worker. Working of its openness to trade and, therefore, can innovate and Paper 2007-004A. St. Louis, Mo.: Federal Reserve Bank of St. Louis. grow more quickly than other developed economies (Brown Aspray, W., F. Mayadas, and M.Y. Vardi, eds. 2006. Globalization and Off- et al., 2006). Others point out that in the 1990s large emerg- shoring of Software: A Report of the ACM Job Migration Task Force. ing economies in India, China, and Russia approximately New York: Association for Computing Machinery. Available online at http://www.acm.org/globalizationreport/. doubled the global supply of labor, thus decreasing returns BLS (Bureau of Labor Statistics). 2005. Occupational Outlook Handbook, to labor and increasing returns to capital (Freeman, 2005a,b). 2006–2007 Edition. Washington, D.C.: U.S. Government Printing Rapid globalization that increases real and perceived job Office. insecurity for a large portion of the U.S. workforce, they Bokorney, J. 2006. Engineers optimistic about industry comeback. EE Eval- say, may sow the seeds of its own destruction by fueling uation Engineering (April). Available online at http://www.highbeam. com/doc/1G1-144966005.html. voter demands for protection from international competition (Anderson and Gascon, 2007).

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18 THE OFFSHORING OF ENGINEERING Brown, C., J. Haltiwanger, and J. Lane. 2006. Economic Turbulence: Is Kuemmerle, W. 1999. Foreign direct investment in industrial research in a Volatile Economy Good for America? Chicago, Ill.: University of the pharmaceutical and electronics industries: results from a survey of Chicago Press. multinational firms. Research Policy 28(2-3): 179–193. Cantwell, J. 1998. The Globalization of Technology: What Remains of the Lunsford, J.L. 2007. Globally outsourced 787 now mess for Boeing Co. Product-Cycle Model? Pp. 263–288 in The Dynamic Firm, edited by A. Wall Street Journal, December 7. P. A1. Chandler, P. Hagstrom, and O. Solvell. New York: Oxford University Mandel, M. 2007. The Real Cost of Offshoring. BusinessWeek, June Press. 18. Available online at http://www.businessweek.com/magazine/ Carmel, E., and P. Tjia. 2005. Offshoring Information Technology: Sourcing content/07_5/b4039001.htm?chan=top+news_top+news+index_ and Outsourcing to a Global Workforce. Cambridge, U.K.: Cambridge businessweek+exclusives. University Press. Mankiw, G.N., and P.L. Swagel. 2006. The Politics and Economics of Off- COSEPUP (Committee on Science, Engineering, and Public Policy). 2005. shore Outsourcing. July. NBER Working Paper No. 12398. Cambridge, Policy Implications of International Graduate Students and Postdoctoral Mass.: NBER. Students in the United States. Washington, D.C.: The National Acad- Mann, C.L. 2003. Globalization of IT Services and White Collar Jobs: The emies Press. Available online at http://newton.nap.edu/catalog/1189. Next Wave of Productivity Growth. International Economics Policy Brief PB03-11. Washington, D.C. Available online at http://www.iie. html. Council of Graduate Schools. 2006. Findings from the 2006 CGS Annual com/publications/pb/pb03-11.pdf. 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