4
A Globalized, Dynamic Information Technology R&D Ecosystem

Profound changes have altered the U.S. national information technology (IT) research and development (R&D) ecosystem during the 1995-2007 period that is the focus on this report. The forces of globalization have shaken the foundations of the product, labor, and financial markets of the IT industry. They have created tremendous opportunity, but they also mean that the United States will have to work even harder to remain the global leader in IT R&D. R&D funding models, in both academic and industrial environments, have also evolved. Finally, the nature of the employer-employee relationship has continued to change across most sectors, but perhaps in a deeper way in the IT industry than anywhere else.

THE GLOBALIZATION OF PRODUCT AND LABOR MARKETS

As world markets such as those of India, China, and Eastern Europe open, competition for information technology workers has become global, with many U.S. companies looking the world over for the best talent, in the right place, at the right price. Most U.S.-based technology companies are now global from birth, driving innovation through collaborations with foreign technologists. For example, Figure 4.1 shows the significant increase from 1990 to 2005 in joint patenting by Silicon Valley inventors working with global teams. Figure 4.1 and Box 4.1 illustrate the global nature of IT innovation and sourcing.

Fueling the trend toward global sourcing are significant advances in telecommunications and networking technologies, as well as the evolu-



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4 A Globalized, Dynamic Information Technology R&D Ecosystem Profound changes have altered the U.S. national information technol- ogy (IT) research and development (R&D) ecosystem during the 1995- 2007 period that is the focus on this report. The forces of globalization have shaken the foundations of the product, labor, and financial markets of the IT industry. They have created tremendous opportunity, but they also mean that the United States will have to work even harder to remain the global leader in IT R&D. R&D funding models, in both academic and industrial environments, have also evolved. Finally, the nature of the employer-employee relationship has continued to change across most sec- tors, but perhaps in a deeper way in the IT industry than anywhere else. THE gLOBALIzATION OF PRODUCT AND LABOR MARKETS As world markets such as those of India, China, and Eastern Europe open, competition for information technology workers has become global, with many U.S. companies looking the world over for the best talent, in the right place, at the right price. Most U.S.-based technology companies are now global from birth, driving innovation through collaborations with foreign technologists. For example, Figure 4.1 shows the significant increase from 1990 to 2005 in joint patenting by Silicon Valley inventors working with global teams. Figure 4.1 and Box 4.1 illustrate the global nature of IT innovation and sourcing. Fueling the trend toward global sourcing are significant advances in telecommunications and networking technologies, as well as the evolu- 0

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0 A GLOBALIzED, DyNAMIC INFORMATION TEChNOLOGy R&D ECOSySTEM 700 600 2000-2005 Number of Patents 500 1995-1999 400 1990-1994 300 200 100 0 Taiwan Israel Japan Singapore South Germany China India Finland Korea FIGURE 4.1 Foreign co-inventors listed on patents with Silicon Valley inventors, 1990-2005. SOURCE: AnnaLee Saxenian, University of California, Berkeley, pre- Figure 4-1.eps sentation to the committee, Mountain View, Calif., February 23, 2007. Based on data needs shades for shapes analysis conducted by Collaborative Economics, Inc., Palo Alto, Calif., 2007. tion of work and business processes. One powerful trend is for firms to consider what work they should retain internally and what they should purchase from outside vendors. The decision to purchase from an outside vendor work that was formerly done internally is termed outsourcing. The other powerful trend is to scan the globe to decide where specific work processes should be undertaken. Often, firms are deciding that work can be done more efficiently and effectively in nations outside the United States. Of course, multinational firms have a long history of establish- ing subsidiaries abroad. What has changed in the past four decades is the increasing movement of work to developing nations. This practice is referred to as offshoring. More recently, there has been an upsurge in offshore outsourcing. Finally, this offshoring initially was for the manufac- ture of goods, but recently it has extended to the production of software and IT services.1 The Offshoring of U.S. IT jobs According to a recent study by the McKinsey Global Institute, the offshoring of work is more prevalent in the IT sector than it is in any of the other U.S. industry sectors studied. Published in 2005, the report esti- mated that by 2008, U.S. firms would offshore 18 percent of their demand for high-wage workers in the packaged-software sector and 13 percent 1Ron Hira and Anil Hira, Outsourcing America: The True Cost of Shipping Jobs Oerseas and What Can Be Done About It, AMACOM, New York, N.Y., 2005.

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08 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM Box 4.1 iPod and iTunes: Internationalization of Design and Implementation The Apple iPod is a digital music player with a highly stylized industrial design and an easy-to-use click-wheel user interface. It was not the first media player, but it is certainly the most commercially successful. The first model was announced on october 2001. By April 2007, over 100 million had been sold. As an example of the rapid design cycle of modern consumer products, five generations have been launched in only 6 years: the iPod, iPod mini, iPod shuffle, iPod nano, and video iPod. The iPod plays audio and video media in standard formats, such as the open standards MP3 (MPEG-1 Audio Layer 3) and Apple proprietary formats. A key element of Apple’s success is the platform which it developed for digital media that encompassed its online store, iTunes. iTunes was introduced in April 2003 to sell individual songs at the price of $0.99 each. iTunes Media is encoded using Apple’s AAC format with additional levels of encryption. The representation and its associated digital rights management system make it possible to authorize up to five computers and an unlimited number of iPods to play the files. An unlim- ited number of audio compact disks can be produced from the digital representa- tion, but at a loss in quality. The iPod offers an interesting case study in the internationalization of prod- uct design and implementation.1 For the fifth-generation video iPod, among the most costly components are those contributed by companies headquartered in Japan (Toshiba, which supplies the hard drive), Korea (Samsung Electronics, which supplies the flash memory), and the United States (Broadcom Corpora- tion, which supplies the multimedia processor). These components are in turn manufactured around the globe—in China (hard drive), in Taiwan or Singapore (media processor), and in Korea (the memory). The device is assembled by the Taiwanese firm Inventec Corporation in Mainland China. The analysis by Linden, Kraemer, and Dedrick indicates that out of a suggested retail price of $299, the cost of all components of the iPod is $144. of the $155 price difference, $80 ac- crues to Apple and $75 to the distributor and retailer. Apple’s value is the single largest component and is larger than that associated with the most expensive physical component, Toshiba’s hard drive. This value of Apple represents the company’s considerable competitive advantage in product conception, design, and marketing. Apple is amply compensated for the innovation that the firm has embedded in the product. The portion captured by U.S. firms—design, distribu- tion, and sales—exceeds the value of its manufactured components. Although to a large extent the iPod is not manufactured in the United States, it is designed and sold here, and U.S. firms do quite well in the bargain. 1See G. Linden, K. Kraemer, and J. Dedrick, “Who Captures Value in a Global Innovation System? The Case of Apple’s iPod,” Personal Computing Industry Center, University of Cali- fornia, Irvine, June 2007.

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0 A GLOBALIzED, DyNAMIC INFORMATION TEChNOLOGy R&D ECOSySTEM in IT services.2 The McKinsey study used data from the U.S. Department of Labor’s Bureau of Labor Statistics, as well as global company-level data, to derive a microeconomic picture of the extent of offshoring that had occurred and was expected to occur. The McKinsey study reported that the theoretical maximum global resourcing for packaged software and IT services represents from 44 to 48 percent of the industry’s total employment. However, it is estimated that only 13 to 18 percent would be offshored, owing to a number of barriers ranging from management attitudes, to business process suitability, to lack of sufficient scale, to intel- lectual property protection.3 Another study, by Alan S. Blinder, also uses the Bureau of Labor Sta- tistics data, devising a model that categorizes jobs into two groups—those that can be personally delivered (e.g., medical care, child care, and so forth) and those that can be “impersonally” delivered—that is, the job can be delivered to the end user electronically over long distances with little or no degradation in quality (for example, by call center operators). 4 Blinder’s study places all IT jobs in offshorable categories and concludes that the percentage of offshorable IT jobs is roughly twice that estimated by the McKinsey study.5 To fully understand the real impact of offshoring in IT, however, one must match up the demand for workers with the supply of workers in the countries to which work is being outsourced. The McKinsey report concludes that although the potential talent pool in low-wage companies is large and growing rapidly, only 17 percent of the potential engineering talent supply is suited for work with international companies.6 The report explains the reasons for its conclusion, which was based on interviews with 83 human resource managers in multinational companies: the reasons are 2McKinsey Global Institute, The Emerging Global Labor Market, June 2005, available at http://www.mckinsey.com/mgi/publications/emerginggloballabormarket/index.asp; ac- cessed August 27, 2007. 3As this report was being prepared for publication, a continued weakening of the U.S. currency had increased the cost of goods and services sourced from abroad. Such a trend decreases the benefits of outsourcing and offshoring for U.S. firms. 4Alan S. Blinder, how Many U.S. Jobs Might Be Offshorable?, Center for Economic Policy Studies [CEPS] Working Paper No. 142, CEPS, Princeton University, March 2007, available at www.princeton.edu/~blinder/papers/07ceps142.pdf. 5The notion that all IT jobs can be done remotely from the consumer and/or the core business was questioned by the committee. Many IT jobs are critical to the successful imple- mentation of a business and/or are central to a firm’s competitive differentiation. Further, IT R&D also involves work by large teams, who collaborate to create new platforms or services. 6Notice that the McKinsey study’s conclusion is a point estimate. It is likely, even ex- tremely likely, that nations and workers will try to improve their education and capabilities so that they can participate in the global economy, because in many of these nations this will ensure higher incomes.

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0 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM dispersion of the labor force, domestic competition for talent, and indi- vidual limitations (e.g., inadequate language skills, limited practical skills, lack of cultural fit, inability to work on teams, and lower educational attain- ment) as well as considerable scarcity of middle-management skills. This shortage of qualified staff is becoming a headache, according to a recent survey conducted by The Economist. According to the 600 executives of multinational companies that were surveyed, the shortage of qualified staff ranked as their biggest concern in China, second in Japan (after cul- tural differences), and fourth in India (after problems with infrastructure, bureaucracy, and wage inflation). The Economist goes on to say: Technical skills, particularly in information technology, are lacking in many parts of the region, even India. One of the main concerns is that there are not enough skilled graduates to fill all the jobs being created in a vibrant sector. Nasscom, which represents India’s software companies, has estimated that there could be a shortfall of 500,000 IT professionals by 2010. This means companies recruiting at job fairs in India are having to make lucrative offers to capture the most promising students. Even a junior software engineer can expect to take home $45,000/year. 7 A high turnover rate also helps to drive up wage costs. The same article in The Economist reminds readers how supply and demand in labor markets must equalize through wages, and that the transfer of IT jobs from countries such as the United States to countries such as India and China, while politically and socially alarming, tends to be an overstated and self-regulating phenomenon. According to the McKinsey study, for IT and engineering-based services, if the United States and the United Kingdom continue at their current rate to concen- trate their activities in India, China, and the Philippines, the U.S. and U.K. demand for engineers will fully absorb the supply of suitable engineers in India, China, and the Philippines by 2011.8 The U.S. Workforce and the global IT Industry Information technology professionals play an important role beyond the research and development organizations of technology vendors. 7“Capturing Talent,” The Economist, August 16, 2007, available at http://www.economist. com/business/displaystory.cfm?story_id=9645045; accessed August 27, 2007. See Rafiq Dossani, India Arriing: how This Economic Powerhouse Is Redefining Global Business, Ameri- can Management Association, New York, N.Y., 2007, for a discussion of how institutions of higher education in India are responding to this shortage. 8McKinsey Global Institute, The Emerging Global Labor Market, June 2005, available at http://www.mckinsey.com/mgi/publications/emerginggloballabormarket/index.asp; ac- cessed August 27, 2007.

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 A GLOBALIzED, DyNAMIC INFORMATION TEChNOLOGy R&D ECOSySTEM Because IT is transforming the foundational business processes of all corporations, IT professionals are increasingly critical to corporations in diverse sectors, such as retailing, hospitality, finance, and pharma- ceuticals. Outside corporate walls, IT professionals are also at work in entrepreneurial and small businesses, as well as creating the next wave of software services through technologies such as the Web 2.0 infrastructure. Many are independent consultants. IT professionals work on a wide variety of challenging technical proj- ects, ranging from research into new scientific frontiers such as high performance computing, speech recognition technology, sensors or radio- frequency identification to new computing platform development and corporate business re-engineering (integrating technology to improve productivity significantly). A recent report from market research firm Forrester Research points to the sophistication of the IT professional job in today’s enterprise.9 According to Forrester, IT professionals can follow a variety of career paths—sourcing, management, innovation, architec- ture—each of which requires a combination of relationship-management, not just project-management, skills and activities. Continued Strong Demand for IT Workers According to data collected by the U.S. Department of Commerce, there are more professional IT workers in the United States today than ever before; “IT professional workers” in this case are defined as computer support specialists; computer programmers; computer systems analysts; computer software engineers; applications, computer, and information systems managers; computer software engineers; systems software, net- work, and computer systems administrators; all other computer spe- cialists; network systems and data communications analysts; database administrators; computer hardware engineers; computer and information scientists; and computing researchers. In fact, a recent report on globaliza- tion and the offshoring of software states:10 According to the U.S. Bureau of Labor Statistics reports, despite a sig- nificant increase in offshoring over the past five years, more IT jobs are available today in the US than at the height of the dot.com boom. More- over, IT jobs are predicted to be among the fastest-growing occupations over the next decade. 9Lorie M. Orlov, Samuel Bright, and Lauren Sessions, Is There a Career Future in Enterprise IT? Forrester Research, Cambridge, Mass., August 10, 2006. 10Association for Computing Machinery Job Migration Task Force, Globalization and Off- shoring of Software: A Report of the ACM Job Migration Task Force, W. Aspray, F. Mayadas, and M. Vardi, eds., Association for Computing Machinery, New York, N.Y., 2006.

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 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM A recent report from the Bureau of Labor Statistics that contains occu- pational employment projections through 2016 states: Computer and mathematical science occupations are projected to add 822,000 jobs—at 24.8 percent, the fastest growth among the eight profes- sional subgroups. The demand for computer-related occupations will increase in almost all industries as organizations continue to adopt and integrate increasingly sophisticated and complex technologies. Growth will not be as rapid as during the previous decade, however, as the software industry begins to mature and as routine work is outsourced overseas. About 291,000—or 35 percent—of all new computer and math- ematical science jobs are anticipated to be in the computer systems design and related services industry. The management, scientific, and technical consulting services industry is projected to add another 86,000 computer and mathematical science jobs. This expected 93-percent increase is due to the growing need for consultants to handle issues such as computer network security.11 The report also states that among all fields of science and engineering, “computer specialist” is projected to account for 77 percent of all job growth and 66 percent of all available jobs (which includes both growth and positions available due to retirement). Data from the National Science Foundation (NSF) reinforce the picture of a relatively strong job market for science and engineering graduates, particularly for computer and information science graduates. According to NSF’s Scientists and Engineers Statistical Data System, the overall unemployment rate of scientists and engineers in the United States was 2.5 percent in 2006, compared with 3.2 percent in 2003; 2.5 percent is the lowest rate since the early 1990s. For computer/information scientists, the overall unemployment rates were 2.5 percent in 2006 (down from 4.0 per- cent in 2003).12 Also, according to a 2006 survey from NSF, the median sal- ary level for computer and information science graduates with bachelor’s degrees was $45,000 (the median for all science and engineering fields was $39,000); at the master’s level, the median salary was $65,000 (the median for all science and engineering fields was $56,000).13 11Arlene Dohm and Lynn Shniper, “Occupational Employment Projections to 2016,” Monthly Labor Reiew, Bureau of Labor Statistics, Washington, D.C., November 2007, pp. 86-125. 12Nirmala Kannankutty, Unemployment Rate of U.S. Scientists and Engineers Drops to Record Low .% in 00, Science Resources Statistics InfoBrief, NSF 08-305, National Science Foun- dation, Washington, D.C., March 2008. For electrical/computer hardware engineers, overall unemployment rates for 2006 were higher than for computer/information scientists, but still improved: 3.3 percent (down from 5.5 percent in 2003). 13Steven Proudfoot, An Oeriew of Science, Engineering, and health Graduates: 00, NSF- 08-34 (revised), March 2008, available at http://www.nsf.gov/statistics/infbrief/nsf08304/,

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 A GLOBALIzED, DyNAMIC INFORMATION TEChNOLOGy R&D ECOSySTEM Strong Concerns About Sustaining a Strong IT Workforce Despite the demand, the number of students specifying an intention to major in computing and information sciences has dropped significantly in the past 6 years. For example, according to College Board data for 2006, the number of students indicating on their SAT test a desire to major in computing and information sciences has dropped by almost 50 percent since 2001.14 Also according to the College Board, in 2006 the SAT math- ematics scores (an indicator for success in IT) of those intending to major in computing and information sciences averaged 478, far lower than the mathematics scores for those intending to major in other scientific and mathematical disciplines. These statistics not only point to a sharp decline in the number of students entering the IT educational pipeline, 15 but also raise a concern about the skill sets of those attracted to the discipline. The problem of declining enrollments in the computing disciplines (as compared with the projected demand) is compounded by the severe lack of participation of underrepresented groups in IT. Although the participation of women, minorities, and people with disabilities in other science, technology, engineering, and mathematics fields is rising overall, their participation is especially low, and even declining, in computing. In 2006, women received 59 percent of all bachelor’s degrees, but only 21 percent of computer science degrees.16 African-American and Hispanic graduates received only 10 percent and 6 percent of 2004 computer sci- ence degrees, respectively. Women and minorities are even more severely underrepresented in positions requiring a doctoral degree. Of the 1,189 Ph.D. graduates in computer science or computer engineering in 2005, only 18 percent were women, and only 38 of the total 1,189 (3 percent) accessed April 9, 2008. See also Jay Vegoso, “Employment and Salaries of Recent CS Gradu- ates,” CRA Bulletin, March 25, 2008, available at http://www.cra.org/wp/index.php?p=141; accessed April 9, 2008. 14College Board, 00 College Bound Seniors: Total Group Profile Report, 2006, available at http://www.collegeboard.com/prod_downloads/about/news_info/cbsenior/yr2006/ national-report.pdf; accessed February 20, 2007. 15Although the following facts are not necessarily a perfect surrogate for high school stu- dents’ interest in computer science, it is interesting to note that about 12,000 students in the class of 2007 took the Computer Science A Advanced Placement (AP) test; about 4,000 took the more rigorous Computer Science AB test. For comparison, about 14,000 students took the Art History and French tests; almost 50,000 took the Economics Macro test, and about 28,000 took the Economics Micro test. See College Board, The th Annual AP Report to the Na- tion, Appendix B, 2008, available at http://professionals.collegeboard.com/profdownload/ ap-report-to-the-nation-2008.pdf; accessed April 4, 2008. 16National Center for Education Statistics, Integrated Postsecondary Educational Data System (00-0), U.S. Department of Education, Washington, D.C., May 1, 2007.

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 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM were members of underrepresented minorities (African-American, Native American, or Hispanic).17 The picture is also bleak in the workforce. In 2006, the percentage of women in management, professional, and related occupations was 50.6 percent, whereas the percentage of women in computer and mathemati- cal occupations was only 25.6 percent.18 Such low participation has implications beyond the nation’s ability to create and sustain a sufficiently large IT workforce. Women and minori- ties can bring different life experiences and perspectives to innovation, which lead to the design of products and services that benefit a broader range of people. Such perspectives are especially important, considering the changing demographics of the U.S. population19 as well as the global market for IT products and services. If U.S. companies intend to maintain their competitive advantage both at home and abroad, they must seek the input of a broader segment of the population to achieve innovation. For example, a recent analysis of innovation and diversity with respect to IT patenting revealed that within the United States, mixed-gender invention teams produced the most frequently cited IT patents—with citation rates that were 26 to 42 percent higher than the norm.20 How can young people be encouraged to enter computing fields? One essential ingredient is to ensure a strong national IT educational pipeline that prepares and encourages all qualified students regardless of race, gender, or ethnicity to enter the discipline. Without sustained attention and additional measures to attract and retain all qualified stu- dents, it will be especially difficult to reverse the negative trends. 21 17S. Zweben, “Record PhD. Production Continues; Undergraduate Enrollments Turning the Corner,” Computing Research News 19(3):7-22, 2007. 18Bureau of Labor Statistics (BLS), Current Population Surey: household Data: Annual Aer- ages: 00, BLS, Washington, D.C., Table 11: Employment by detailed occupation, sex, race, and Hispanic ethnicity, p. 212. 19Council of Economic Advisors for the President’s Initiative on Race, Changing America: Indicators of Social and Economic Well-Being by Race and hispanic Origin, U.S. Government Printing Office, Washington, D.C., September 2007, available at http://www.access.gpo. gov/eop/ca/index.html. 20Catherine Ashcraft and Anthony Breitzman, Who Inents IT? An Analysis of Women’s Par- ticipation in Information Technology, National Center for Women and Information Technology, Boulder, Colo., March 2007. 21For examples of new measures to improve STEM education and strengthen educational opportunities for students in K-12 (such as ways to retain and reward the most effective teachers), see “Testimony of William H. Gates, Chairman, Microsoft Corporation and Co- Chair, Bill & Melinda Gates Foundation, Before the Committee on Science and Technology, United States House of Representatives, March 12, 2008,” available at http://democrats. science.house.gov/Media/File/Commdocs/hearings/2008/Full/12mar/gates_testimony_ 12mar08.pdf; accessed March 17, 2008.

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 A GLOBALIzED, DyNAMIC INFORMATION TEChNOLOGy R&D ECOSySTEM Concerns About K- IT/Computing Education and Talent Generation Concerns about talent generation are exacerbated by the state of the kindergarten-through-grade-12 (K-12) IT/computing education system in the United States. In its report The New Educational Imperatie: Improing high School Computer Science Education, the Computer Science Teachers Association (CSTA) correctly assesses the situation as follows: Computers have infiltrated all areas of society, and there is now a clear link between technology, innovation, and economic survival. In light of this, one would expect a move within our society to support and stan- dardize computer science education. Yet, no national K–12 computer science curriculum exists. Lack of leadership on high school computer science education at the highest legislative and policy levels has resulted in insufficient funding for classroom instruction, resources, and profes- sional development for computer science teachers. In addition, complex and contradictory teacher certification requirements as well as salaries that cannot possibly compete with industry make it exceedingly difficult to ensure the availability of exemplary computer science teachers. In the face of confusing definitions of computer literacy, information fluency, and the various sub-branches of computer science itself, many schools have lost sight of the fact that computer science is a scientific discipline and not a “technology” that simply supports learning in other curricu- lum areas. Computer science is not about point and click skills. It is a discipline with a core set of scientific principles that can be applied to solve complex, real-world problems and promote higher-order thinking. In short, knowledge of computer science is now as essential to today’s educated student as any of the traditional sciences.22 In addition to resources, appropriate information technology fluency objectives for K-12 are needed.23 Recent research by the CSTA shows the following: • Only 26 percent of schools require students to take a computer sci- ence (CS) course; • Only 40 percent of schools even offer advanced placement (AP) CS; • Lack of time in the students’ schedules is the greatest impediment to students taking computing courses; 22Computer Science Teachers Association (CSTA), The New Educational Imperatie: Im- proing high School Computer Science Education, available at http://csta.acm.org/; accessed August 27, 2007. 23For an early assessment of fluency issues, see National Research Council, Being Fluent with Information Technology, National Academy Press, Washington, D.C., 1999.

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 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM • 89 percent of high school computer science teachers say that they experience a sense of isolation and a lack of collegial support in their schools and in their districts; • Most administrators do not understand that computing is a scien- tific discipline just like physics and biology; • There is no consistency in CS teacher certification requirements; • Computing teachers do not receive the professional development that they need to keep their teaching and technical skills current; • Administrators, legislators, and congressional committees do not understand the link between supporting K-12 computing education and economic and workplace issues.24 Such concerns about the professional IT pipeline and talent pool have arisen as the U.S. share of worldwide bachelor’s and doctoral degrees in science and engineering has decreased significantly. The relative decline in the U.S. global position in science and technology overall is also evi- dent in the falling U.S. share of global R&D investment, patents, scientific publications, and researchers (see Table 4.1). If it is to maintain its founda- tion for competitive strength, the United States faces a long-term need to attract qualified people to science and technology careers.25 THE gLOBALIzATION OF vENTURE CAPITAL Until the late 1980s, for all intents and purposes the United States was the only nation with a vibrant venture capital industry that supported technology-based start-ups.26 For this reason the United States was in a privileged position. For an entrepreneur seeking to build a global- class IT firm, it was necessary to come to the United States—and many entrepreneurs did. It was in the 1990s that venture capital industries in Taiwan and Israel began growing, with the Taiwanese venture capitalists funding manufacturing firms such as Quanta Computer Incorporated and ASUSTeK Computer; in Silicon Valley they funded start-ups particularly 24Computer Science Teachers Association (CSTA) Curriculum Improvement Task Force, The New Educational Imperatie: Improing high School Computer Science Education, CSTA, As- sociation for Computing Machinery, New York, N.Y., February 2005. 25For a business-oriented discussion of the importance of maintaining the STEM pipeline, see, for example, Testimony of William H. Gates, Chairman, Microsoft Corporation and Co- Chair, Bill & Melinda Gates Foundation, Before the Committee on Science and Technology, United States House of Representatives, March 12, 2008, available at http://democrats. science.house.gov/Media/File/Commdocs/hearings/2008/Full/12mar/gates_testimony_ 12mar08.pdf; accessed March 17, 2008. 26The committee thanks Martin Haemmig, Martin Haemmig International, for providing much of the venture capital data used in this section.

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8 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM According to the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce, U.S. gross domestic product (GDP) was about $13,247 billion in 2006. Of this, some $521 billion (almost 4 percent) is attributed to what BEA classifies as the “information-communications- technology (ICT) producing industries.”64 Furthermore, this sector— sparked and fueled by IT R&D—experienced double-digit real growth for the third consecutive year in 2006, increasing by 12.5 percent. 65 In 2006, these industries accounted for about 4 percent of the economy but contributed 14.2 percent of real GDP growth.66 Table 4.7 shows a differ- ent measure of the sector’s economic contribution: its contribution to real value added (real value added captures the contribution of an industry’s labor and capital to real GDP). These contributions, although substantial, reflect only a portion of the overall long-term benefits from IT research investments. Organization of University Research Federal funding for university research in information technology has traditionally followed a model of a three-legged stool (see Box 4.3 for a quick view into one university’s funding sources and patterns). One leg consisted of modest grants provided by the National Science Foundation67 and the Defense Science Offices (Office of Naval Research, Army Research Office, and Air Force Office of Scientific Research) to single investigators to work primarily on fundamental research problems. These were either peer-reviewed or evaluated by a panel drawn from technical experts within the government. The grants were sufficient to fund one to two students to work on a research problem. 64According to the BEA, the ICT-producing industries consist of the following: com- puter and electronic products within durable-goods manufacturing; publishing industries (including software) and information and data processing services within information- producing industries; and computer systems design and related services within profes- sional, scientific, and technical services. See Thomas F. Howells III and Kevin B. Barefoot, “Annual Industry Accounts—Advance Estimates for 2006,” Surey of Current Business, Table 1, May 2007, Bureau of Economic Analysis, Washington, D.C., available at http://bea. gov/scb/pdf/2007/05%20May/0507_annual_industry_accounts.pdf; accessed August 28, 2007. 65See ibid., Table B. 66See ibid., Table A. 67NSF’s Directorate for Computer and Information Science and Engineering (CISE) sup- ports research in three broad areas: computing and communication foundations, computer and network systems, and information and intelligent systems. Other IT-relevant funding sources include the NSF’s Office of Cyberinfrastructure and initiatives within the Engineer- ing Directorate.

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 A GLOBALIzED, DyNAMIC INFORMATION TEChNOLOGy R&D ECOSySTEM TABLE 4.7 Percentage Changes in and Real Value Added to U.S. Gross Domestic Product, by Industry Group, 2003-2006 2003 (%) 2004 (%) 2005 (%) 2006 (%) U.S. gross domestic product 2.5 3.9 3.2 3.3 Private industries (overall) 2.7 4.2 3.3 3.7 Information-communications- 7.2 13.7 13.3 12.5 technology (ICT)-producing private industries SOURCE: Data from Thomas F. Howells III and Kevin B. Barefoot, “Annual Industry Accounts—Advance Estimates for 2006,” Surey of Current Business, Table B, May 2007, Bureau of Economic Analysis, Washington, D.C., available at http://bea.gov/scb/pdf/ 2007/05%20May/0507_annual_industry_accounts.pdf; accessed August 28, 2007. As a second leg of this model and at the opposite extreme from mod- est grants to single investigators, the NSF also funded larger-scale, theme- oriented research endeavors through such programs as Engineering Research Centers and Science and Technology Centers. The Department of Defense (DOD) developed the Multidisciplinary University Research Initiative (MURI) Program for similar purposes. These programs were intended to receive support for relatively long periods of time—5 to 10 years, rather than 2 or 3 years for single-investigator grants—and often involved further requirements in terms of industry or institutional match- ing support. Such centers could encompass the research activities of two dozen faculty members or more, with the result that funding was thinly spread and best used to support work at the intersection of individual investigators’ interests. Critical-mass research efforts necessary to achieve breakthroughs were difficult to achieve. The third leg, uniquely epitomized by Defense Advanced Research Projects Agency (DARPA) support, was critical-mass funding for small teams of faculty and their graduate students: 5 to 6 investigators plus 15 to 20 graduate students. The level of funding was comparable with and sometimes exceeded that of an NSF center, but it was focused on the research activity of a much smaller group. Furthermore, such efforts were not pursued in a vacuum but in the context of a program (see Box 4.4). These efforts consisted of perhaps a dozen similarly sized teams, span- ning universities and industry, developing competing technologies but also cooperating on developing a common underlying infrastructure— including, importantly, a research community in an area of strategic need. Examples include the DARPA VLSI Project and the High Performance

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0 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM Box 4.3 The Changing Sources of Information Technology R&D Funding The Computer Science and Artificial Intelligence Laboratory (CSAIL) at the Massachusetts Institute of Technology (MIT) is one of the premier information technology university laboratories in the world. With 93 principal investigators, 471 graduate students, 112 research staff, 46 other staff, and a $45 million per year research expenditure, it is without question a large research enterprise. The laboratory has long enjoyed high levels of research support from the Defense Advanced Research Projects Agency (DARPA). Table 4.3.1 shows the percentage breakdown of funding sources for the MIT laboratory’s activities between 2000 and 2008.1 The data show a dramatic decrease in the percentage of DARPA funding, matched by a similarly large in- crease in funding from the National Science Foundation (NSF). By the end of the period, the laboratory’s funding base is more balanced than in 2000, with roughly equal portions from nongovernment sources (mostly industry), NSF, and the Department of Defense (DoD). In 2000, DoD provided almost two-thirds of the laboratory’s funding. TABLE 4.3.1 Percentage of Funding for MIT’s Computer Science and Artificial Intelligence Laboratory, 2000-2008, by Source 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source (%) (%) (%) (%) (%) (%) (%) (%) (%) Nongovernment 28.3 33.0 43.2 46.7 39.5 33.1 32.8 32.1 30.8 Government 71.7 67.0 56.8 53.3 60.5 66.9 67.2 67.9 69.2 NSF 7.5 7.9 9.9 15.3 22.9 25.3 26.8 26.7 27.4 DOD Total 62.9 54.2 43.6 33.4 29.7 28.6 24.3 27.8 29.7 DARPA 51.6 47.9 37.9 26.6 25.6 25.6 19.6 23.1 24.2 Other U.S. 1.3 4.9 3.3 4.6 7.9 13.0 16.1 13.4 12.1 Government SoURCE: Rodney Brooks, Massachusetts Institute of Technology, “IT Research Funding: An MIT CSAIL Perspective,” presentation to the committee, Boston, Mass., April 19, 2007. Table 4.3.1 in Box.eps Updated and corrected percentages provided to the committee by personal communication from Rodney Brooks, July 15, 2008. one dimension of the data not made obvious in this table is the increas- ing level of support from foreign firms for MIT’s research. Quanta Computer, a major manufacturer of personal computers based in Taiwan, has entered into a long-term, $20 million research agreement with MIT to investigate what will come “beyond the notebook computer.”2 Nokia, a major manufacturer of telecommunica-

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 A GLOBALIzED, DyNAMIC INFORMATION TEChNOLOGy R&D ECOSySTEM Box 4.3 continued tions equipment based in Finland, has established a research laboratory close to MIT to pursue collaborative activities.3 Clearly, even support for university research is becoming globalized. 1Rodney Brooks, Massachusetts Institute of Technology, “IT Research Funding: An MIT CSAIL Perspective,” presentation to the committee, Boston, Mass., April 19, 2007. 2See “Quanta Computer, Inc. and the Massachusetts Institute of Technology Announce TParty Project–CSAIL Spotlight,” http://www.csail.mit.edu/node/363; accessed December 11, 2008. 3See “Nokia and the Massachusetts Institute of Technology Celebrate the opening of Nokia Research Center Cambridge,” April 21, 2006, available at http://press.nokia.com/ PR/200604/1046070_5.html; accessed August 24, 2007. Computing and Communications Program of the late 1980s through the 1990s. This program type of organization was essential in transitioning fundamental research to a size and scale of proof of concept that the rest of the ecosystem could then begin to commercialize.68 In 2000, NSF introduced the Information Technology Research (ITR) Program to provide a large-grant funding mechanism. The program did not, however, provide the same sort of programmatic context that DARPA has been able to provide. Thus, the research teams were not organized in a way that enabled them to achieve even better results through the process of competition, cooperation, shared infrastructure, and research community formation. With DARPA’s shift away from its traditional sup- port for university-based information technology research in this decade, this third leg of the stool, critical for the field’s success in the past, has largely been lost. In 2007, however, the NSF Directorate for Computer and Information Science and Engineering (CISE) made a small but positive step forward in this regard, with the new Expeditions in Computing Program, which is 68For more on DARPA’s early and continuing roles in IT, see “Happy Birthday, Sputnik! (Thanks for the Internet),” Computerworld, September 24, 2007, available at http://computer world.com/action/article.do?command=viewArticleBasic&articleId=9036482&pageNumber=1; accessed October 18, 2007.

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 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM Box 4.4 The Role of the Defense Advanced Research Projects Agency in the organization of Information Technology R&D In the early years of the information technology (IT) industry in the United States, the Department of Defense (DoD) played a crucial role, as a supporter of research and as a sophisticated procurer of IT systems. In the 1960s and 1970s, the DoD pulled forward such strategic IT sectors as integrated circuits, computer- aided design software, time-sharing systems, and packet switching networks (i.e., the Advanced Research Projects Agency network, or ARPAnet). The science offices of the military services—the office of Naval Research (oNR), the Army Research office (ARo), and the Air Force office of Scientific Research (AFoSR)—have a long history of supporting fundamental research related to DoD missions. Further, the DoD maintains its own establishment of research laboratories, to develop specific prototype defense capabilities while also evaluating concepts from the defense contractor community. In terms of organizing research outside the DoD, the major funder of IT research and advanced devel- opment has traditionally been DARPA: the Defense Advanced Research Projects Agency (originally “ARPA”).1 Formed in the late 1950s in the wake of the Soviet launching of Sputnik and the American public furor that followed,2 the agency has acquired an almost magical reputation for establishing ambitious research goals, organizing research communi- ties, and executing programs that expand the technology base to demonstrate new military capabilities. The agency’s unofficial charter is to “avoid future technological surprise.” Its modus operandi is critical-mass funding to support project teams, or- ganized into cooperative and competitive multiteam programs, under the direction of an empowered program manager (PM) who stands as the mediator between the researchers on the one hand and the DoD customers on the other.3 Many within the IT research community point to the late 1980s and early 1990s as the high-water mark of DARPA support for the field. The mid-1980s saw the emergence of DARPA’s Strategic Computing Program (SCP) to apply artificial intelligence (AI) techniques to DoD applications in autonomous vehicles, in fleet battle management, and in a pilot’s associate. In addition to the demand pull that these stressing applications placed on speech understanding, computer vision, user interfaces, and planning systems, they also put stretch demands on the un- derlying networked hardware and software systems on which they would execute. That is, these applications’ requirements pushed the state of the art in these fields and also required more capabilities in the underlying systems. Therefore, SCP represented a very significant increment in defense funding for IT research.4 1For more on DARPA (originally ARPA) management style, see National Research Coun- cil, Funding a Revolution: Government Support for Computing Research, National Academy Press, Washington, D.C., 1999, pp. 98-105. 2Roger D. Launiusk, “Sputnik and the origins of the Space Age,” available at http://history. nasa.gov/sputnik/sputorig.html; accessed March 27, 2008. 3See “Strategic Vision,” available at http://www.darpa.mil/stratvision.html; accessed January 7, 2009. 4Alex Roland and Philip Shiman, Strategic Computing: DARPA and the Quest for Machine Intelligence, 1983-1993, MIT Press, Cambridge, Mass., 2002.

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 A GLOBALIzED, DyNAMIC INFORMATION TEChNOLOGy R&D ECOSySTEM Box 4.4 continued The High Performance Computing Act of 1991 (Public Law 102-194) was motivated in part by a 1988 report of the National Research Council, Toward a National Research Network.5 Key outcomes of the act were the creation of the federal High Performance Computing and Communications (HPCC) Program 6 and the establishment of a mechanism to coordinate research in communications across the science and technology agencies of the government.7 Although some agencies saw their funding for HPCC-related research increase owing to the act, much of the work that came under the HPCC rubric was already being carried out by federal agencies. The multiagency focus combined with the HPCC Program’s high visibility and compelling stretch performance goals are credited with motivating a whole generation of researchers to enter the field and contribute to HPCC’s success. The size and diversity of the research program grew significantly, encompassing more universities and more firms. A perhaps less well known outcome was that the High Performance Computing Act has fostered collaborative work in which a small number of research administrators within these diverse and often competitive organizations have worked together to rationalize their research and development investments in order to maximize leverage and minimize overlap of effort and to promote and publicize their scientific and technical accomplishments. on the nega- tive side, some have observed that the size of the program attracted the attention of lobbyists, who sought to influence procurements, and of legislators, who sought to earmark funds for projects within their constituencies. Within the DoD, SCP evolved from an AI program with a modest comput- ing component to a major program in HPCC. The program laid the foundation for today’s scalar cluster-based processors and storage systems on which virtually every major Web site depends. By the mid-1990s, DARPA deemphasized its in- vestment in high performance computing, with the technical leadership shifting to the Department of Energy Accelerated Strategic Computing Initiative (ASCI) Program.8 The ASCI Program focused on developing very large scale parallel 5National Research Council, Toward a National Research Network, National Academy Press, Washington, D.C., 1988. This publication is sometimes referred to as the Kleinrock report, after the authoring committee’s chair, Leonard Kleinrock. 6See, for example, D.B. Nelson, “High Performance Computing and Communications Pro- gram,” Proceedings of the 1992 ACM/IEEE Conference on Supercomputing, Minneapolis, Minn., 1992. 7Membership in the program, now known as the Networking and Information Technology Research and Development Program, has expanded over the years. The current members are the Agency for Healthcare Research and Quality, the Defense Advanced Research Projects Agency, the National Nuclear Security Agency, the office of Science of the Department of Energy, the Environmental Protection Agency, the National Archives and Records Administra- tion, the National Aeronautics and Space Administration, the National Institutes of Health, the National Institute of Standards and Technology, the National oceanic and Atmospheric Administration, the National Security Agency, the National Science Foundation, and the offices of the Deputy Under Secretary of Defense (Science and Technology) and Director of Defense Research and Engineering of the Department of Defense. 8Department of Energy, Defense Programs, Accelerated Strategic Computing Initiative (ASCI) Program Plan, DoE/DP-99-000010592, Washington, D.C., January 2000. continued

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 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM Box 4.4 continued machines targeted for the department’s nuclear weapons design needs (known as stockpile stewardship). Most of its funding was directed to its contractor- managed weapons laboratories—Lawrence Livermore National Laboratory, Los Alamos National Laboratory, and Sandia National Laboratories—and the machine vendor community. The university HPCC community found it increasingly difficult to receive critical funding to sustain the project teams that had been formed during the earlier stages of HPCC, particularly in areas of computer architecture, parallel software, and internetworking. In 1998 the Next Generation Internet Research Act (Public Law 105-305) was passed, broadening the scope and name of the pro- gram to the Networking and Information Technology Research and Development (NITRD) Program. Today, the NITRD Program and the National Coordination office for NITRD are together the major coordinating umbrella for IT research within the federal government. Two major characteristics of DARPA-sponsored IT research between the 1960s and 1980s contributed to its success. The first was DARPA’s particular style of project-focused research, mentioned above, typically spanning teams of four to five faculty investigators and their students (although teams also included industrial participants), organized into programs in which the teams are driven to cooperate and/or compete through the oversight of the PM. The PM served as a critical intermediary between the researchers and the military customer, plac- ing the research results in the relevant military context while also expressing the military needs in a language that the researchers could understand. The second characteristic was the recognition that it is often just as strategic to build a research community, such as one skilled in developing software for new parallel architec- tures, as it is to develop the particular technologies that such a community might invent. These characteristics of DARPA successes suggest that simply increasing funding without such a programmatic structure will not yield an ecosystem that is as effective as it was during the past. intended to provide longer-term research support for teams. The program currently has a total budget of $30 million. Each expedition will be funded at up to $2 million per year for 5 years, and CISE estimates that it will provide three new awards each year.69 69According to CISE, “The intent is to provide the opportunity to pursue ambitious, fun- damental research agendas that promise to define the future of computing and information. In planning Expeditions, investigators are encouraged to come together within or across departments or institutions to combine their creative talents in the identification of compel- ling, transformative research agendas that promise disruptive innovations in computing and information for many years to come.” See “Expeditions in Computing,” September 13, 2007, available at http://www.nsf.gov/pubs/2007/nsf07592/nsf07592.txt; accessed October 23, 2007.

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 A GLOBALIzED, DyNAMIC INFORMATION TEChNOLOGy R&D ECOSySTEM CHANgES IN THE RELATIONSHIP BETWEEN EMPLOyEES AND EMPLOyERS The foundations of the American system of employment were con- ceptualized under the New Deal and institutionalized in law and by col- lective bargaining agreements. In return for employees’ loyalty and best efforts, employers agreed to fulfill both legally and culturally prescribed obligations: a reasonable expectation of job security and such benefits as health insurance and pension plans. Beginning in the mid-1980s, the cul- tural contract between worker and employer began to unravel as employ- ment practices and policies shifted toward a laissez-faire philosophy remi- niscent of the 19th and early 20th centuries.70 This context is important when considering the IT workforce issues and patterns of student enroll- ments discussed previously. A number of developments contributed to this unraveling. The first was “downsizing” or “rightsizing,” euphemisms for what had formerly been known as “layoffs.” Until the mid-1980s most layoffs occurred dur- ing recessions or when firms found themselves in financial trouble. Lay- offs were primarily confined to blue-collar and clerical workers, who often returned to work once the economy improved. In hard times, pro- fessionals and managers could assume that they were safe even from temporary layoffs. During the 1980s, the rules of the game changed. For the first time in history, firms began to shed professional, technical, and managerial workers in large numbers. In fact, by the mid-1990s corporate downsiz- ings were more likely to target managers and professionals than to dis- miss other white-collar or blue-collar workers.71 Moreover, downsizings, 70The unraveling of the New Deal employment system has been exetensively documented in Thomas A. Kochan, Harry C. Katz, and Robert B. McKersie, The Transformation of American Industrial Relations, Basic Books, New York, N.Y., 1986; Peter Cappelli, Laurie Bassi, Harry Katz, David Knoke, Paul Osterman, and Michael Useem, Change at Work, Oxford, New York, N.Y., 1997; Paul Osterman, Broken Ladders: Managerial Careers in the New Economy, Oxford University Press, New York, N.Y., 1996; Paul Osterman, Securing Prosperity: The American Labor Market: how It has Changed and What to Do About It, Princeton University Press, Prince- ton, N.J., 1999; and Paul Osterman, Thomas A. Kochan, M. Locke Richard, and Michael J. Piore, Working in America: Blueprint for the New Labor Market, MIT Press, Cambridge, Mass., 2001. 71On the nature and extent of downsizing, see Thomas S. Moore, The Disposable Work Force, Aldine, New York, N.Y., 1996; American Management Association,  AMA Surey on Downsizing, Job Elimination and Job Creation, New York, N.Y., 1996; and Harry S. Farber, “The Changing Face of Job Loss in the United States: 1981-1995,” pp. 55-142 in Brookings Papers on Economic Actiity: Microeconomics, The Brookings Institution, Washington, D.C., 1977. On the impact of downsizing on employee perceptions, attitudes, and lives, see Katherine Newman, Falling from Grace: The Experience of Downward Mobility in the American Middle Class, Vintage, New York, N.Y., 1989; Charles Heckscher, White-Collar Blues, Basic Books, New York, N.Y.,

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 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM unlike layoffs of the past, seemed independent of economic cycles. Under pressure from global competition and their stockholders, firms had dis- covered that streamlining the workforce was necessary to achieve their bottom-line targets and boost their stock prices.72 By the late 1990s three practices were augmenting and exacerbating the downsizing: the outsourcing of work to external suppliers, the off- shoring of jobs, and the use of contingent labor. Contingent workers are individuals hired, often through staffing agencies, for a limited period of time to perform specific work. Although firms have long employed temporary workers for seasonal and short-term needs, during the late 1980s corporations began to view temporary labor as an extension of the broader strategy of outsourcing. The shift from permanent to contingent employment became particularly widespread in IT centers and among high-technology firms.73 The Bureau of Labor Statistics reported that, by 1995, 40 percent of all programmers and 29 percent of other IT work- ers were either contingently employed or worked through outsourcing firms.74 In Silicon Valley, contractors often comprise between 15 and 30 percent of the labor force.75 Data on employment turnover are consistent with the demise of employment security and stable relations between employers and employ- ees. Between 1983 and 2004, average tenure with one’s current employer fell by 2.1 years (from 7.3 to 5.2 years) among men between the ages of 35 and 44. Among men between 45 and 54 and between 55 and 65 years of age, the declines were greater: 3.2 years (from 12.8 to 9.6 years) and 5.5 years (from 15.3 to 9.8 years), respectively.76 The combination of downsizing, outsourcing, offshoring, and contin- gent work dramatically altered the tenor of the employment relationship. The first casualty was loyalty. Despite stable levels of job satisfaction and 1995; Denise Rousseau, Psychological Contracts in Organizations, Sage Publications, Thou- sand Oaks, Calif., 1995; and Denise Rousseau and R.J. Anton, “Fairness and Obligations in Termination Decisions: The Role of Contributions, Promises and Performance,” Journal of Organizational Behaior 12(4):287-299, 1991. 72Wayne F. Cascio, Clifford E. Young, and James R. Morris, “Financial Consequences of Employment-Change Decisions in Major U.S. Corporations,” Academy of Management Journal 40(5):1175-1189, 1997. 73Stephen R. Barley and Gideon Kunda, Gurus, hired Guns and Warm Bodies: Itinerant Ex- perts in a Knowledge Economy, Princeton University Press, Princeton, N.J., 2004. 74Angela Clinton, “Flexible Labor: Restructuring the American Workforce,” Monthly Labor Reiew 120(8):3-27, 1997. 75Chris Benner, Work in the New Economy: Flexible Labor Markets in Silicon Valley, Blackwell, Malden, Mass., 2002. 76Bureau of Labor Statistics (BLS), Employee Tenure in 00, USDL-04-1829, BLS, Washing- ton, D.C., 2004, available at http://www.bls.gov/news.release/History/tenure_09212004. txt.

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 A GLOBALIzED, DyNAMIC INFORMATION TEChNOLOGy R&D ECOSySTEM a vibrant economy, employees became increasingly distrustful of their employers and less sanguine about their future over the 1990s.77 Employ- ers, for their part, dropped the pretense of hiring with any expectation of a long-term relationship. Some openly cautioned new hires about the firm’s limited commitment to them. Apple’s human resource policy, which was reputedly given to each new hire, stated: Here’s the deal Apple will give you; here’s what we want from you. We’re going to give you a really neat trip while you’re here. We’re going to teach you stuff you couldn’t learn anywhere else. In return . . . we expect you to work like hell, buy the vision as long as you’re here. . . . We’re not interested in employing you for a lifetime, but that’s not the way we’re thinking about this. It’s a good opportunity for both of us that this is probably finite.78 The second and more important casualty of the altered employment relationship has been the integrity of America’s system for insuring the health and welfare of the workforce. During the New Deal the govern- ment and industry reached an agreement on how to care for the sick and elderly: Rather than adopting national and universal health care coverage and pension funds, Americans would receive health insurance and pen- sions through their employers. The employment relationship thus became the cornerstone of America’s social safety net, but as the health care costs and pension obligations have risen and as job security has fallen, an increasing number of employers have ceased providing either benefit to workers. Between 1979 and 2004, the percentage of Americans with employer-provided health insurance fell from 69 percent to 56 percent. The rate of decline has been even steeper for Hispanic Americans.79 While the trends are not specific to the IT industry, not only is it not immune to them, but the fast-changing nature of IT businesses, their rapid globaliza- tion, and the need for maximal flexibility of operations has exacerbated these trends in the IT industry. Trends in pension funds are equally striking.80 Between 1983 and 2004, the percentage of American workers covered only by a defined- 77National Research Council, The Changing Nature of Work: Implications for Occupational Analysis, National Academy Press, Washington, D.C., 1999. 78Barbara Ettorre, “The Contingency Workforce Moves Mainstream,” Management Reiew 83(2):10-16, 1994, quoting from Apple Computer’s written employment contract with every full-time employee. 79Lawrence Mishel, Jared Bernstein, and Sylvia Allegretto, The State of Working America, An Economic Policy Institute Book, Cornell University Press, Ithaca, N.Y., 2007, Figure 3H. 80Data on participation in pension plans are from Alicia H. Munnell and Annika Sunden, “401K Plans Are Still Coming Up Short,” in Issues in Brief, Center for Retirement Research, Boston College, Boston, Mass., 2006.

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8 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM benefit plan fell from 62 percent to 20 percent. Conversely, during the same period the percentage of the workforce covered only by a defined- contribution plan grew from 12 percent to 63 percent. As of 2004, one-fifth of working Americans who were eligible to contribute to defined contri- butions made no contribution whatsoever. Less than 1 percent of work- ers earning less than $60,000 annually contribute the maximum. Among those earning between $60,000 to $80,000 annually, only 8.3 percent make maximum contributions. In fact, only 58 percent of Americans who make more than $100,000 a year contribute maximally. The situation among technical contractors is at least equally dire, if not more so. Although the well-educated and well-paid high-tech contractors whom Barley and Kunda81 interviewed were mostly in their 40s and 50s, 45 percent had no retirement account whatsoever. Another 20 percent had only an indi- vidual retirement account (IRA). Only 20 percent participated in a 401K or simplified employee pension (SEP) plan. 81Stephen R. Barley and Gideon Kunda, Gurus, hired Guns and Warm Bodies: Itinerant Ex- perts in a Knowledge Economy, Princeton University Press, Princeton, N.J., 2004.