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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications
4
Workshop Findings and Discussion
The NAE workshop on the offshoring of engineering addressed the effects on several key industries but was not a comprehensive examination of offshoring in all industries or all aspects of engineering. The study committee took into account engineering employment, salaries, and education and recent debates about the policy implications of offshoring.
The committee also identified areas for future study. The committee understands “globalization” to be a widespread, long-standing process whereby national economies and business activities are becoming increasingly integrated and interdependent, mainly through expanded trade, capital flows, and foreign direct investment. “Offshoring” refers to a more recent phenomenon of work relocated and diffused across national borders, enabled by advances in communications technology and changes in management practices.
Although a wide range of services work is being offshored, this workshop and report focus only on engineering and the impact of business practices, such as the international diffusion of corporate R&D, and the movement of engineering work as a result of the relocation of manufacturing activity. The report also includes examples of “onshoring,” engineering work moved to the United States from abroad. A more detailed explanation of the committee’s working definition of offshoring is provided in Chapter 2.
The workshop discussions and commissioned papers on six specific industries show how the offshoring of engineering work affects the U.S. engineering enterprise. Clearly, less complex work that does not require interaction with customers is offshored first. However, evidence shows that the level of sophistication increases over time, except in industries where R&D is being diffused, such as pharmaceuticals, or when the relocation of product and manufacturing engineering is closely tied to the relocation of manufacturing facilities, as in the automotive industry. In the semiconductor and software industries, the increase in offshoring in the last five years has led to a complete transformation of the business models for those industries. In other industries, such as construction engineering and services, the impact of offshoring has been less obvious.
The findings and discussion that follow are not arranged in order of priority.
TRENDS AND IMPACTS
Effects by Industry Sector
FINDING 1. The offshoring of engineering, an inevitable aspect of globalization, has significantly impacted the U.S. engineering enterprise. However, the effects of globalization and offshoring have been uneven, and disparities among industry sectors and engineering sectors are likely to continue.
Offshoring has increased most rapidly in information technology (IT)-related industries such as software, semiconductors, and PC manufacturing. As Ralph Wyndrum, then president of IEEE-USA, points out in his paper on the implications of offshoring for the engineering workforce and profession, “virtually all bids for commercial work now include an offshore component …” (this volume). For both established U.S.-based IT firms and start-ups, the location of at least some engineering work in India or China is now taken for granted. In fact, in most IT-related sectors (e.g., semiconductors, software, and PC manufacturing), the offshoring of engineering work is an established part of the business model for U.S.-based companies.
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The Indian software industry, which employed more than 500,000 people and exported $17 billion in 2005, has grown at an annual rate of 30 to 40 percent over the past decade (Dossani, this volume). At the same time, the proportion of software exports accounted for by foreign (predominantly U.S.-based) companies has increased, as has the sophistication of the product mix. Thus the Indian software industry is tightly integrated with U.S.-based software development.
In the semiconductor industry, some steps (e.g., assembly, packaging, and testing) in the manufacturing process have long been globalized. In recent years, more sophisticated steps, such as wafer fabrication, have followed suit. Offshoring of semiconductor design is also increasing rapidly. In fact, 18 of the top 20 U.S.-based companies have opened design centers in India, nine of them since 2004 (Brown and Linden, this volume).
The manufacture of PCs and many PC components was moved from the United States to Taiwan more than a decade ago. Since then, it has been moved again, almost exclusively to China (Dedrick and Kraemer, this volume). In addition, much of the product design and engineering for PCs is now done by original design manufacturers based mainly in Taiwan.
Some engineering activities in the automotive industry and construction engineering and services industry have long been internationalized. U.S.-based auto companies have traditionally followed an imperative of manufacturing where they sell, and they often design and develop vehicles for specific markets (Moavenzadeh, this volume). Thus the employment of significant numbers of engineers abroad by U.S.-based companies in the auto industry is nothing new. Similarly, construction engineering and services firms that operate globally have always required engineering help in the countries where projects are located (Messner, this volume).
Nevertheless, the offshoring of less complex engineering work is increasing in both of these industry sectors. In the auto industry, some companies are trying to boost the productivity of their global engineering workforces by organizing distributed teams around global tasks. For example, global engineering leadership for a certain category of vehicle may be located in a specific country (e.g., full-size trucks in the United States, compact cars in Korea). Engineering teams in several countries contribute to the design of specific models.
Finally, the trend toward globalization of R&D in a range of other industries, including pharmaceuticals, is almost certain to gain momentum in coming years. For example, well over half of the more than 200 U.S.- and Europe-based companies that responded to a recent survey anticipate increasing technical employment in China, India, and other locations in Asia in the next three years (Thursby and Thursby, 2006).
The Need for Data
FINDING 2. More and better data on offshoring and other issues discussed in this report, such as the effects on the engineering workforce and engineering education, are necessary for discerning overall trends. As has been pointed out in other recent reports, better U.S. and international statistics on trade in services and employment would give us a much better grasp of basic trends.
Although various surveys, projections, and analyses by consulting companies, academics, and others can shed some light on the situation, significant data gaps have kept policy makers and the public from getting an accurate read on what is actually occurring in the international trade in services and offshoring. Several recent reports (GAO, 2005a,b; NAPA, 2006; Sturgeon, 2006, etc.) have pointed out deficiencies in U.S. government statistics. For example, trade statistics track many fewer categories of service products than manufactured goods, even though services now constitute a much larger share of the U.S. economy than manufacturing. In addition, current employment statistics make it impossible to track employment by occupation over time.
Statistics on the science, technology, engineering, and mathematics workforce could also be improved (Ellis et al., 2007). One improvement would be for agencies that collect and publish these data to adjust the classifications and coding so that occupations are easier to identify and track. An example of the problem, cited by Ellis et al. (2007), is the difficulty of tracking postsecondary teachers, who are usually subsumed in the general category of educators. Thus tracking jobs in engineering is difficult because, in some fields, academics make up a large percentage of the total workforce. In addition, more information on citizenship and the migration of engineers would make it easier to understand offshoring and discern other trends in the engineering workforce.
A study of offshoring in specific industries is no doubt valuable, but we must remain cognizant of the lack of timely, comprehensive data. We must also keep in mind that, even if we had all relevant information, it would represent only a snapshot in time. Thus all estimates or projections include considerable uncertainties, as offshoring continues to change!
Although many basic questions about offshoring, particularly questions specific to engineering, cannot be answered definitively, a review of the literature on offshoring, and trade in services generally, reveals several points of rough consensus. The combination of technological advances, innovations in management techniques, and the accessibility of overseas talent has made a growing number of services jobs vulnerable to offshoring. Estimates of the number of vulnerable U.S. jobs vary considerably, from the most common estimates of around 10 percent of the current workforce (NAPA, 2006)1 up to 40 million (Blinder, 2006).
1
In April 2007, for example, U.S. employment stood at 145.8 million, 10 percent of which is 14.6 million.
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Estimates of the number of jobs that will actually be offshored vary as well. These estimates are generally expressed as the number of jobs offshored over a period of time (NAPA, 2006). For example, Forrester estimates that 3.4 million jobs will be offshored from 2005 to 2015 (340,000 per year); Goldman Sachs estimates that 6 million will be offshored from 2003 to 2013 (600,000 per year) (GAO, 2004). Thus, despite a consensus that offshoring is significant and increasing, it is impossible to say what the net impacts on U.S. employment have been or will be.
Even if the number of jobs offshored is at the high end of estimates, only a small percentage of overall jobs in the services sector would be lost (or gained) when trends in the domestic U.S. economy are factored in. After the collapse of the tech bubble and during the slow recovery that followed, some U.S.-based companies announced large-scale layoffs in the United States, at the same time launching new operations overseas, particularly in India. However, since 2005, the U.S. tech economy has stabilized and recovered, and there have been fewer cases like these. Thus, overall, there may still be net job creation in the United States in many occupations that will be subject to widespread offshoring over the long-term.
Even though engineering is on almost every list of occupations vulnerable to offshoring, the uncertainties in estimates of offshoring of engineering are even greater than for offshoring in general. For example, McKinsey Global Institute (2005), based on its global analysis, estimates that more than half of engineering positions in the industries it examined could be performed anywhere in the world. NASSCOM (2006) projects that the Indian engineering services offshoring industry will grow from about $1.5 billion today to $30 to $60 billion by 2020.
Yet it would be unwarranted to conclude that half of the 1.5 to 2 million current U.S. engineers are in danger of losing their jobs in the next few years. For one thing, the Bureau of Labor Statistics estimates that the U.S. engineering workforce will grow by 13 percent between 2004 and 2014, roughly in keeping with the projected growth of the total U.S. workforce (CPST, 2006). For another, offshoring will be limited by the supply of talent available in destination countries. Although emerging economies such as India and China are turning out large numbers of young engineers and are taking steps to increase their numbers and improve their quality, the speed at which these improvements can be made is limited. McKinsey (2005) estimates that only 15 to 20 percent of young engineers in developing countries are currently qualified to work in international companies. Finally, developments in the United States will play an important role. For example, U.S. engineering education may or may not evolve in ways that support engineering as a profession that can attract more of the best and brightest U.S. students.
The emergence of offshoring signaled the beginning of an era in which a broad swath of the U.S. workforce, including engineers and workers in many other services professions, became subject to international competition. Based on a comprehensive, up-to-date understanding of trends in offshoring, the United States can remain a premier location for engineering activity, and the engineering enterprise can adapt and renew itself. However, for the United States to develop policies to preserve its economic vitality and avoid adopting policies that are counterproductive, policy makers must have a clear understanding of what is happening and why.
At the organizational level, the institutions and associations that educate and rely on engineers also need to understand trends in offshoring as a basis for developing new approaches to defining necessary skills and training engineers for careers in a globalized world. On the personal level, individual engineers must have the information they need to determine the most promising career paths and prepare themselves accordingly.
Realistically, it may be some time before even glaring data deficiencies are addressed. In addition, much of the offshoring activity by companies is inherently difficult to track through trade statistics. As a result, although industryspecific analyses of the type commissioned for this workshop will continue to be important sources of information about offshoring and globalization, they can provide only a snapshot. Further studies will be necessary as engineering offshoring evolves.
Winners and Losers
FINDING 3. Offshoring appears to have contributed to the competitive advantage of U.S.-based firms in a variety of industries, and the negative impacts of offshoring on U.S. engineering appear to have been relatively modest to date. However, the negative effects have been much more severe in some industry sectors and for some jobs than others.
Cost reduction is often an important factor in the initial offshoring decision, particularly for IT-related companies. Another consideration is the need to compete in new or rapidly growing markets. For individual businesses, decisions about where to locate engineering activities are made on the basis of both value and the potential for market growth—similar to the way decisions concerning access to capital and other resources are made. The second factor has been very important to foreign-based firms locating engineering activities in the United States. This so-called “onshoring” is an important part of the overall picture of globalization.
Although some kinds of offshoring have appeared only recently, disaggregated business models have a long history in several U.S. industries. For example, “fabless” semiconductor companies that contract out manufacturing first appeared in the 1990s. U.S. firms developed this model, and fabless companies (e.g., Broadcom) are among the most successful and fastest growing semiconductor companies in the past decade. The “foundry” industry, which fabricates
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semiconductors on a contract basis, emerged in Taiwan and is now expanding in China.
Similarly, branded firms in the U.S. PC industry began offshoring manufacturing long ago; over time, they have also offshored significant engineering tasks. Careful coordination and management of offshoring has enabled companies such as Dell and Hewlett-Packard to hold down costs and remain competitive in an industry with rapid product cycles. Apple used a disaggregated business model to create a new category of products that straddle the line between IT and consumer electronics (e.g., the iPod), and, in the process, accelerate its growth.
The key to long-term success for companies shifting toward globalization of engineering activities appears to be protecting the interface with customers and the resulting information flow. Knowledge from customers feeds into product definition, high-level design, and the most sophisticated engineering tasks. The effective use of offshoring has helped many PC firms sustain their U.S. operations.
Like the initial movement of manufacturing activity to overseas locations, much of the upsurge in offshoring of design and engineering work has been motivated by attempts to keep costs under control, or even to reduce them. This is clearly the case in IT-related sectors that have offshored engineering and other functions. However, decisions about locating R&D facilities overseas, even in emerging economies such as China, are often also influenced by other factors, including the desire for companies to establish a full-spectrum presence in rapidly growing markets (Thursby and Thursby, 2006). In addition, some companies are trying to access specific expertise with their R&D investments.
The “onshoring” of R&D and other engineering work—multinational companies based in Europe or Asia establishing or acquiring operations in the United States—is a significant trend in the pharmaceutical and automotive industries. Companies such as Toyota and Honda are expanding their engineering employment in the United States. Even companies based in India and China are beginning to make R&D investments in this country.
In general, the lack of comprehensive, accurate data makes it difficult to measure the net impact of offshoring on engineering jobs and salaries in recent years. Remember that the upsurge in offshoring coincided with a downturn in the U.S. economy that hit the tech sector particularly hard (the dotcom bust). During the first half of the 2000s, unemployment in subsectors of the engineering workforce rose to record levels, while salaries remained flat or even declined. By 2005, employment and salaries had begun to recover, and by early 2007, the unemployment rate for engineering and architectural occupations had fallen considerably. At the same time, offshoring apparently continued to expand. Clearly, it is difficult to separate the impacts of broad economic changes, offshoring, and related trends in globalization, such as increased immigration.
Even if the net impact of offshoring on employment in the engineering workforce is relatively small, there are still some winners and some losers. When certain routine engineering tasks are moved to India or China, U.S. engineers who previously performed those tasks might lose their jobs. At the same time, more jobs may be created for U.S. engineers performing higher level tasks. Hira and Hira (2005) describe the difficulties faced by tech workers displaced by offshoring or immigration. The negative individual and social impacts of mass layoffs in general, not necessarily in engineering, are described by Uchitelle (2006). The issues for engineering education and public policy raised by this displacement are discussed in more detail below.
IMPLICATIONS FOR ENGINEERING EDUCATION
FINDING 4. Engineering education at the undergraduate and graduate levels has been a major source of strength for the U.S. engineering enterprise. Even today, engineers educated in the United States remain among the best trained and most flexible in the world. At a time when other nations are making significant efforts to upgrade their engineering education capabilities, the United States will be challenged to sustain engineering education as a national asset.
Based on workshop discussions, both industry and academic participants believe that U.S. engineering education will continue to be a valuable asset as the U.S. engineering enterprise adapts to new global realities. Charles Vest, NAE president and President Emeritus of MIT, presents the overall case for U.S. engineering education (this volume), while Ted Rappaport, director of the Wireless Networking and Communications Group at the University of Texas at Austin, details the importance of academic engineering research and education to the key field of network systems (this volume).
Nevertheless, other countries and regions are working hard to upgrade their engineering education capabilities and adapt them to new global realities. For example, European countries are working toward standardizing degree programs so that engineers at a certain degree level in, say, Spain will have skills and attributes similar to those of engineers at that level, or its equivalent, in, say, Sweden.
Emerging countries, most prominently China and India, which are the prime destinations for offshoring, are taking substantial steps to increase their capacities for delivering high-quality engineers. China has adopted a top-down, directive approach, while India has adopted a more market-oriented, bottom-up approach (Wadhwa et al., 2007a,b). China appears to be focusing on increasing the number of Ph.D. and master’s-level engineers and scientists to meet future R&D needs. India is producing more graduates with the skills and aptitudes appropriate for the jobs being created there today. The number of graduate engineering degrees in China has increased from about one-fourth as many as in the United States in 1995 to a higher number than in the United
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States today. At the same time, large numbers of students from China and India continue to come to the United States for graduate engineering education.
As offshoring and the general globalization of engineering continue, more and more engineering work will be performed by multi-country teams and in other international contexts. Speakers at the workshop and the authors of the commissioned papers identified several areas in which U.S. engineering educators might consider new approaches, particularly in communication and management skills, to meet the demands of a globalized engineering environment. These areas of change were compatible with the findings and recommendations in several recent reports by NAE and others and statements by professional societies.
For example, a 2004 report by the American Society of Civil Engineers on the “body of knowledge” necessary for civil engineers concludes that management and communication skills should be part of the engineering curriculum. In two reports issued by the NAE Engineer of 2020 Project, in 2004 and 2005, just as attention was turning to offshoring, a key observation was that “good engineering will require good communication.” In fact, all recent studies on this subject recognize that the nature of engineering is changing in ways that will require engineers to work across sectoral and disciplinary boundaries as well as national borders. Interacting effectively with and being accountable to diverse, global customers means that engineers will have to “listen effectively as well as communicate through oral, visual, and written mechanisms” (NAE, 2004, 2005).
Opportunities for leadership will increase but will require new levels of sophistication (NAE, 2004). Past experience has shown that engineers who have mastered business and management principles are often rewarded with leadership roles. The study committee of the present report urges U.S. engineering educators to prepare students to tackle these global challenges.
At the same time, many engineers, and the profession as a whole, have sometimes been ambivalent about engineers moving into management, policy making, and other fields, rather than remaining in technical roles. In addition, the financial compensation for engineers in non-technical roles tends to be higher than for those who remain in technical positions. As a result, professional societies and other engineering leaders have urged employers to ensure that there are attractive career tracks for mainstream engineers.
Maintaining technical career tracks and technical currency through continuing education (discussed below) will be challenging in an environment where offshoring and globalization are changing the nature of engineering work. Engineering educators and the engineering profession will have to monitor the global marketplace for engineers and consider how well current educational approaches are preparing students to meet the demands of that marketplace. Understanding deficits in skill sets and addressing them, increasing the participation of women and minorities, and providing more varied and realistic career paths for students with engineering degrees will be crucial for the future.
FINDING 5. Although individual engineers must ultimately take responsibility for their own careers, industry, government, universities, professional societies, and other groups with a stake in the U.S. engineering enterprise should consider supporting programs and other approaches to helping engineers manage their careers, renew and update their skills, and sustain their capacity to innovate, create, and compete.
A continuing subject of discussion both during the workshop and the steering committee meetings was the effects of offshoring on individual engineers. As companies and other organizations grow and shrink and as jobs are gained and lost, the environment for engineering work is changing significantly. Engineers who are proactive in keeping their skills up to date and are able to take advantage of the trend toward more frequent job and career shifts have adapted well to these changes and are much less vulnerable to the negative effects of offshoring.
Those who are not as skilled or proactive are faced with job insecurity and slow wage growth. During the workshop discussions and in his paper, Ralph Wyndrum, then president of IEEE-USA, the largest U.S. professional engineering society, called for renewed efforts on the part of all stakeholders in U.S. engineering—educators, professional societies, employers, government, and engineers themselves—to address the needs of mid-career engineers faced with the prospect of developing new skills and abilities for a constantly changing job market (in this volume). This support could be an important factor in determining whether U.S. engineering retains its global leadership position.
Both of the NAE 2020 reports highlighted the need for lifelong learning and that the engineering education system must do more to help students become self-learners. In addition to the challenge of global competition, the body of knowledge in engineering is expanding exponentially and pressuring engineers to keep up by becoming ongoing learners. One challenge that may arise for employers will be balancing the benefits of “up-skilling” their workers with the risks of making their employees highly desirable to other companies. As one workshop participant noted, “poaching” by competitors can be a problem for companies that maintain a highly trained staff. Everyone agreed, however, that choosing not to up-skill workers is not the solution to this problem.
Most professional societies and many engineering schools already offer continuing education programs for mid-career professionals. To determine what else might be done, it would be helpful to have an in-depth assessment of current efforts to determine if mid-career engineers are taking advantage of these programs and, perhaps, to suggest incentives that might encourage further participation. An inventory of
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lifelong-learning programs and participation would also be a valuable tool for policy makers and private organizations.
During the workshop discussions, one participant suggested that an engineering degree should come with a warranty, or a coupon, for “free upgrades.” Another model would be “executive” technical degrees similar to executive MBAs. Others have suggested the creation of an 8- to 12-year learning model that would be the shared responsibility of universities and employers. A useful model might be military academies and services, which have adopted a systematic approach to continuing education. In the final analysis, government may have to help provide incentives and wherewithal for individual mid-career engineers to take advantage of opportunities for learning.
This study and workshop highlighted the need for more discussion of these issues, not only in connection with engineering education, but also for the future of U.S. leadership in a global economy. Many have called for assistance to engineers and other service workers whose jobs are displaced by offshoring, including, perhaps, public subsidies for continuing education. Approaches that have been discussed include (1) expanding eligibility for Trade Adjustment Assistance to engineers and other service-industry workers who lose their jobs and (2) providing some form of wage insurance to help displaced workers who are forced to take lower paying jobs.
FINDING 6. Over the past several decades, engineering has become less attractive to U.S. students as a field of study and as a career compared to some other professions. Although it is widely assumed that globalization and offshoring are contributing to this relative decline in popularity, it is impossible to know how important globalization is compared to other factors. A great deal more needs to be understood about the relationship between offshoring and the attractiveness of engineering as a career.
Concerns about whether offshoring has a negative effect on the public perception of engineering and whether this perception causes fewer of the “best and brightest” to pursue engineering careers were raised numerous times at the workshop and in several of the commissioned papers (e.g., Stevens and Rappaport in this volume). Certainly, engineering is a less popular undergraduate major than it was. Between 1983 and 2002, the number of bachelor’s degrees in engineering declined by about 16 percent (NSB, 2006). During that same period, the overall number of bachelor’s degrees increased by about 33 percent. Thus engineering degrees as a percentage of the total declined from 7.4 percent to 4.6 percent.2 We have anecdotal evidence, but very limited data at this point, to determine if offshoring and globalization are contributing to the decline and, if so, to what extent. As noted in Chapter 2, decline in popularity decreases, from about 10 percent to 8.4 percent. the growth of offshoring coincided with the dot-com bust and
Questions about the negative perceptions of engineering persist, as do questions about whether, and what, the engineering profession should do about them. Other professions, such as medicine, business (at the graduate level), and law continue to attract ambitious, bright students at least partly because of real or perceived high payback, and the lack of early high payback may discourage students from going into some engineering fields. However, payback is not always predictable. For example, graduates in civil engineering who chose to go into the field of information technology in the late 1990s because of higher starting pay might have regretted that decision a few years later.
Engineering managers trying to “connect” with the “millennial generation” and communicate the excitement of engineering careers must address not only salaries and job security, but must also convey the excitement of opportunities for engineers to make a difference and improve people’s quality of lives (Stevens, this volume). Changing public perception of engineering may require a systematic, well thought out campaign of public education. This was the conclusion of a study committee of a 2002 NAE report (Davis and Gibbin, 2002).
IMPLICATIONS FOR PUBLIC POLICY
FINDING 7. For the United States, attracting and retaining world-class engineering activities in an increasingly competitive global environment will require that core U.S. strengths be sustained. Perhaps the most critical task in doing so will be to avoid complacency.
Several speakers at the workshop addressed the issues raised by globalization for U.S. engineering. In the opinion of Charles Vest, even in a “flatter” world, the United States and U.S. engineers enjoy significant advantages. The biggest threat to our future success, he believes, is complacency (Vest, this volume). Robert Galvin, Chairman Emeritus of Motorola Inc., described how addressing global challenges in energy and transportation would create engineering jobs in the United States (this volume). Ted Rappaport, stressed the importance of public investment in network systems and other critical areas (this volume). Overall, the speakers agreed that public and private efforts to tackle large, even global, problems could help create entire new industries and would go a long way toward creating new opportunities for U.S. engineers. A number of recent reports have also explored what the United States can, indeed must, do to maintain its lead in science and engineering (COSEPUP, 2005; Council on Competitiveness, 2005).
FINDING 8. Plausible scenarios have been developed showing that offshoring either helps, is neutral, or hurts engineering in the United States. Only continued discussions
2
When engineering and computer science degrees are combined, the a downturn in the overall economy.
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and further studies will lead to a thorough understanding of the potential benefits and costs of offshoring.
For the American public and the U.S. economy as a whole, the offshoring phenomenon, and offshoring of engineering in particular, could have a number of costs and benefits. The workshop discussions and presentations shed some light on the magnitude and likelihood of these costs and benefits. Of course, a clearer picture will emerge over time.
Potential Benefits
U.S.-based companies that manage offshoring effectively appear to be benefiting in terms of competitiveness and profitability. Having access to skilled engineers at lower cost may create a climate for faster, more cost-effective innovation and might even ultimately lead to higher employment levels in the United States.
Offshoring has become an accepted component of the business model in some industries, particularly IT-related industries and electronics (Wyndrum, this volume). Start-up companies that combine U.S. project management and market savvy, Indian engineering implementation, and, perhaps, Chinese manufacturing capabilities, can stretch the dollars of venture capitalists and improve the odds of their survival and ultimate success. At the same time, these companies increase the potential for innovation and the development of new products that might not have appeared as quickly, or even at all, without offshoring.
It has long been assumed that globalization and trade will ultimately deliver net benefits to the U.S. economy. According to one analysis, globalization since World War II has increased the U.S. GDP anywhere from $800 billion to $1.4 trillion per year ($7,000 to $13,000 per household) (Bradford et al., 2006). As a continuation of globalization, offshoring might also deliver net economic benefits. However, many questions are being raised about whether this will happen.
Offshoring is delivering economic benefits to several emerging economies, particularly India and China. The argument has been made that long-term U.S. interests will be served as these countries and other developing economies become integrated into the global economy and living standards rise, even though this will inevitably lead to better engineering capabilities in these countries. If U.S. engineering capability can be sustained, the emerging global networks will be open to participation by Americans and American organizations. In that case, globalization would present a “win-win” situation, because U.S. engineers would also benefit directly through expanded markets for their skills.
Potential Costs
There are many possible downsides to this scenario. Some have argued that offshoring and other forms of trade can undermine U.S. economic strength and national interests (e.g., Gomory and Baumol, 2001). Some prominent economists have raised concerns that the distributional impacts of offshoring on engineers and other service-sector workers in the United States will pose a serious challenge to free trade (Blinder, 2006). Others argue that offshoring might lead to a degradation of U.S. engineering capability and that, even if the U.S. engineering enterprise and economy as a whole are better off as a result of offshoring, those who are most vulnerable to competition might suffer severe hardships.
One scenario in which U.S. engineering capability might be damaged through offshoring is if U.S.-based companies attempting to take advantage of lower costs and perceived better value move a large percentage of engineering, R&D, and other activities from the United States to the developing world over a short period of time, giving engineers and others who would lose jobs little time to anticipate or adjust to significant change. Although this is within the realm of possibility, there are reasons to believe that a wholesale shift of engineering work from the United States to China and India is unlikely. First, as described in Chapter 3, the gaps and deficiencies in the science and engineering enterprises of large emerging economies will take time to address. Second, as the engineering capabilities in emerging economies improve, the productivity and pay of their engineers are also likely to rise, thus reducing the cost advantage of offshoring.
In another scenario, U.S. engineering capabilities might atrophy gradually as the result of a combination of depressed wages and job insecurity, which would discourage significant numbers of young Americans from entering the engineering profession. Many studies and debates have attempted to determine the number of engineers and scientists necessary to the U.S. economy, whether or not there is or will be a shortage, the number of engineering graduates produced by the United States compared with China and India, and whether offshoring of engineering and other forms of trade could erode America’s ability to innovate, which could leave the country as a whole worse off (e.g., COSEPUP, 2005; Wadhwa et al., 2007a).
These and other questions raised at the workshop will continue to be discussed, and the answers will surely affect the evolution of offshoring.
Incentives and Disincentives
FINDING 9. As the debate about offshoring continues, it will be important to determine whether current U.S. policies, including immigration policies, provide artificial advantages or incentives for offshoring.
There have been many calls for changes in policy to provide assistance to engineers and other service workers whose jobs are displaced by offshoring. One mechanism would be to expand the number of people eligible for
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benefits through Trade Adjustment Assistance. Currently only people whose jobs are lost due to imports of goods are eligible, but many believe people whose jobs are lost because of imports of services should also be eligible (e.g., Kletzer and Rosen, 2005). Assistance might also be provided through some form of wage insurance to help displaced workers adjust if they are forced to take lower paying jobs (Andrews, 2007). Of course, these kinds of policies would have widespread repercussions and must be explored thoroughly before they are adopted.
Immigration Policy
Although a detailed examination of immigration policies for engineers was beyond the scope of this study, immigration issues are closely related to offshoring. Wyndrum argues that several major participants in offshoring use H-1B and L-1 visa programs to bring in employees, train them in the United States, and then send them back to their countries to expand the company’s offshoring operations (this volume). Abuses of these visa programs by recruiting firms have also been reported. Some workshop participants reported that their companies participate in the H-1B program to reduce costs but have found that cost and uncertainties involved in hiring visa holders can offset some of the anticipated savings. Other companies hire visa holders because they are unable to find qualified, highly trained engineers who are U.S. citizens.
There is a good deal of debate and uncertainty about the current and future role of foreign engineering students. Does the United States rely too heavily on foreign engineering talent? Might fewer foreign students study at U.S. engineering schools in the future, and might fewer of those who graduate from U.S. institutions remain in this country? Some analysts have asserted that a growing number of U.S.-educated foreign science and engineering students are returning to their home countries (Newman, 2006). However, an annual survey of foreign engineering students who receive doctorates from U.S. institutions shows that “stay rates” have remained about the same in recent years (NSB, 2006).
Some argue that, as immigration policies become more stringent, the United States will be cutting itself off from a vital source of engineering talent. Clearly, the immigration of scientists and engineers, the training of foreign students, and the overall openness of the United States to foreign talent has been a boon to U.S. engineering and to the larger U.S. economy. Others argue that stricter policies could, in effect, subsidize or provide artificial incentives for offshoring engineering, which would be just as counterproductive and market-distorting as erecting artificial barriers or penalties for offshoring.
All of these questions should be investigated thoroughly as part of the policy making process.
Security Issues
FINDING 10. Security concerns related to the offshoring of engineering have been raised, specifically for the information technology and construction industries.
Concerns about national and homeland security related to offshoring have been raised in connection with several of the industries studied at the workshop. For example, offshore construction engineering and services might result in detailed plans and other information about U.S. buildings and critical infrastructure falling into the wrong hands (ASCE, 2005). Similar concerns have been raised about offshoring of engineering work that involves geospatial data (MAPPS, 2006). Legislation was proposed in the last Congress to address the latter issue, and relevant professional societies are working to ensure that sensitive information is protected within the existing legal framework.
Concerns have also been raised about whether the globalization of software development poses a serious threat to national and homeland security, particularly if accidental defects or maliciously placed code could compromise the security of U.S. Department of Defense (DOD) networks (Hamm and Kopecki, 2006). The Defense Science Board (DSB) is currently completing a study on how DOD should address these concerns. DSB previously issued a report raising concerns about the migration of semiconductor technologies offshore and how U.S. military access to critical microelectronics manufacturing capability could be maintained (DSB, 2005).
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