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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications
Part I
Consensus Report
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications
1
Introduction
The phenomenon of “offshoring”—the transfer of work previously performed in the United States to affiliated and unaffiliated entities abroad—suddenly emerged as a major issue in the U.S. political debate a few years ago. At the time, employment and wages were recovering slowly from a recession precipitated by the “dot-com bust” and the 9/11 attacks. Particularly during 2003–2004, news reports of companies simultaneously cutting staff in the United States and launching extensive new operations in lower wage economies abroad attracted attention, and criticism, from many quarters.
Particular concerns were raised about the transfer of work in engineering and information technology (IT). These jobs not only had high skill requirements; they also commanded higher than average wages. In addition, the emergence of offshoring coincided with high levels of unemployment in some engineering specialties, such as electrical and computer engineering. The widely held assumption that U.S. engineering and high-technology jobs were invulnerable to international competition was suddenly called into question.
With the subsequent economic recovery and lower unemployment rates among engineers and other affected groups, fewer headlines referred to offshoring. However, this important aspect of the global economy is not well understood, especially how it fits into the broader context of globalization.
Clearly, business infrastructure, particularly in IT-related businesses, has developed to the point that many service jobs are now “tradable.” These include customer-service functions, such as call centers, tax preparation, and accounting, and a variety of IT-related jobs (e.g., database administration). Over time, we might expect the kinds of tasks that can be offshored to increase. The availability of significant numbers of appropriately skilled overseas workers who are willing to work for salaries significantly lower than prevailing U.S. salaries provides an incentive for companies to achieve cost savings by offshoring. Even if wages for the most accessible and skilled of these workers are bid up to levels near those of wages in developed countries, we can expect the supply of workers to increase over time as other individuals, firms, and countries seek out, or begin to provide, the training and connectivity they need to participate in a global service economy.
A number of individual scholars and organizations are investigating the offshoring phenomenon, and several useful studies and analyses have recently been published. Nevertheless, significant gaps in knowledge remain. In fact, there are formidable barriers to compiling a reasonably complete picture of current and likely future conditions. For example, existing categories in official statistics of production, trade, and the labor force reflect past, rather than present (or future), business structures and economic activities.
In addition, much of the information about the microeconomic trends in individual companies and whole industries, which is necessary to construct a complete picture of offshoring, is considered proprietary. This is largely the result of controversies that arose in 2003–2004, when companies that engaged in offshoring were heavily criticized in the media. Since that time, these companies have been careful about releasing information that might open them to heightened scrutiny or criticism (see Dobbs, 2004).
THE GOALS AND PROCESSES OF THIS STUDY
Offshoring raises basic questions for the engineering profession and enterprise in the United States that must be
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications
answered before rational decisions can be made about policies (e.g., the debate over H-1B visas) or strategies to address the consequences. For example, we need to determine which fields of engineering and what types of engineering work (e.g., research and development [R&D], R&D management, design, manufacturing, marketing, customer support, and so forth) are being offshored and why. We need to know if the rationale for offshoring in engineering differs from industry to industry, and if so, how. We need to know if the rationale varies over time. What makes some industries more susceptible to offshoring than others (e.g., government regulation, intellectual property laws, and other factors)? How do the effects of offshoring compare/interact with the effects of other factors, such as increased automation, improved technology, or reorganization? What impact do these factors have on the number and composition of engineering jobs in different sectors? How do patterns of engineering offshoring compare with patterns of “onshoring” (bringing in engineering jobs from other countries through direct foreign investment)? What is the relationship between offshoring and the immigration of skilled workers, both temporary and permanent? How much do foreign companies rely on engineering services performed in the United States? Can we characterize differences in performance between engineering service-sector jobs performed abroad and those performed at home? Has offshoring impacted our security? Many, many more questions could be added to this list.
The National Academy of Engineering (NAE) launched this study to help fill in some of the information gaps. Because the engineering enterprise is a pillar of U.S. national and homeland security, economic vitality, and innovation, this study will be of great interest to many people outside the engineering community. The primary goal of the study is to improve our understanding of the scope, composition, and motivation for offshoring and to consider the implications for the future of U.S. engineering practice, labor markets, education, and research. The specific statement of task for the committee is provided in Box 1-1.
For several reasons, distinctions are made in the papers and analysis between U.S.-based companies and companies based elsewhere. First, the industry-focused papers show that U.S.-based companies have tended to undertake offshoring earlier and more extensively than firms based elsewhere. Second, although firms based outside the United States employ a significant and growing share of the overall U.S. workforce, including U.S. engineers, the majority of U.S. engineers are still employed by U.S.-based companies, and the actions of U.S.-based companies still have a disproportionate impact on
BOX 1-1
Project Statement of Task
National Academy of Engineering
Committee on the Offshoring of Engineering
Statement of Task
The National Academy of Engineering will form an ad hoc committee to organize and conduct a public workshop on the issue of offshoring of U.S.-based jobs having significant engineering content.
Workshop presentations and commissioned papers will present what is known about offshoring from a broad perspective and in specific industries, such as information technology, construction and civil engineering, automobiles, and pharmaceuticals. The workshop will bring together analysts from government statistical agencies (e.g., National Science Foundation, Bureau of the Census, and others); experts from engineering professional societies, industry, foundations, and academia; and leaders in engineering education who have collected data and can offer insights and observations.
Based on the workshop, the committee will prepare a report aimed at improving understanding of the scope, composition, motivation, and outlook for offshoring, and on considering the implications for the future of U.S. engineering practice, labor markets, education, and research. The questions to be addressed include:
What do we definitively know about the current status and trends regarding offshoring of work with significant engineering content, including the extent, motivation, types of work subject to offshoring, industry-specific characteristics, and future prospects?
What are the key areas where data is lacking, and how might information gaps be filled?
Given what we currently know, are there actions or options that engineering educators, professional societies, industry leaders, policy makers, and the engineering community at large should consider to strengthen the U.S. engineering enterprise in the face of offshoring and the continuing globalization of the engineering enterprise?
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications
U.S. engineering. Although the interests of U.S. engineers and the engineering enterprise are not exactly the same as those of U.S.-based companies, the location of corporate headquarters still matters in important ways.
Clearly, NAE’s underlying interest is in the long-term health and prosperity of the engineering enterprise in the United States. The engineering enterprise includes engineering professionals, the organizations that employ them, the institutions that educate and train them, the government entities that support and rely on engineering, and the societies and associations that serve the engineering profession.
NAE President Wm. A. Wulf appointed an ad hoc steering committee composed of eight NAE members representing a range of engineering fields and two additional experts to oversee the drafting of the commissioned papers, develop the agenda for the public workshop, and prepare the final report. The papers provide an overview of offshoring in specific industries—software, personal computer manufacturing, automobiles, semiconductors, construction engineering and services, and pharmaceuticals. Taken together, these six industries account for a significant share of U.S. engineering activity. In all of the selected sectors, significant research on globalization and U.S. competitiveness has been done in recent years. However, some important industries that also employ engineers were not included, such as financial services, transportation/logistics, aerospace, and others. The papers can be found in Part 2 of this report.
The committee met face to face in April 2006 and held regular teleconferences throughout the project. The public workshop was held in October 2006. Following the workshop, the steering committee prepared a summary report, including findings, and provided suggestions to the authors of the commissioned papers, who then revised their work. In addition, several experts who made presentations at the workshop were invited to convert their presentations into brief papers (see Part 2). By its nature, this project does not constitute a comprehensive examination of all industries or all aspects of engineering.
Following the workshop, the steering committee developed this report, which includes an overview of the current state of knowledge based on available contextual materials (Chapter 2) and summaries of the insights from the workshop (Chapters 3 and 4). Chapter 4 also includes the committee’s findings and conclusions, restatements of outstanding questions and issues, and suggestions for next steps by government and the private sector.
In the course of organizing the workshop and preparing the summary, the committee reviewed some recent analyses of offshoring, as well as articles that have appeared in the business and general press. Because the offshoring of engineering is a complex, controversial phenomenon that is changing rapidly, the conclusions of scholars and analysts on all sides of the issues were questioned and their ideas debated.
Some of the examinations of offshoring the committee found most useful have been called into question because they were produced by organizations affiliated with companies or associations with financial or other interests in offshoring. The committee kept these affiliations in mind in preparing the report. However, because the report does not include policy recommendations, and because one of the key findings is that more data are needed on offshoring, the committee chose not to continually raise questions about sources that have not been challenged on substantive grounds. In addition, the NAE Program Office commissioned an overview paper to review statistical and other sources (Morgan, 2006). Finally, although a variety of sources is referenced in the summary, the primary bases for the committee’s findings are the industry-focused commissioned papers and the workshop discussions.
REFERENCES
Dobbs, L. 2004. A Home Advantage for U.S. Corporations. Commentary, August 27. Available online at http://www.cnn.com/2004/US/08/27/home.advantage/index.html.
Morgan, R.P. 2006. The Impact of Offshoring on the Engineering Profession. Background paper prepared for the National Academy of Engineering. Available online at http://www.nae.edu/nae/engecocom.nsf/weblinks/PGIS-6WHU3R/$file/Morgan%20Paper.pdf.
