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entitled 'Offshoring: U.S. Semiconductor and Software Industries 
Increasingly Produce in China and India' which was released on 
September 7, 2006. 

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Report to Congressional Committees: 

September 2006: 

Offshoring: 

U.S. Semiconductor and Software Industries Increasingly Produce in 
China and India: 

GAO-06-423: 

GAO Highlights: 

Highlights of GAO-06-423, a report to congressional committees 

Why GAO Did This Study: 

Much attention has focused on offshoring of information technology (IT) 
services overseas. “Offshoring” of services generally refers to an 
organization’s purchase from other countries of services such as 
software programming that it previously produced or purchased 
domestically. IT manufacturing, notably semiconductor manufacturing, 
has a longer history of offshoring of manufacturing operations. Under 
the Comptroller General’s authority to conduct evaluations on his own 
initiative, GAO addressed the following questions: (1) How has 
offshoring in semiconductor manufacturing and software services 
developed over time? (2)What factors enabled the expansion of 
offshoring in these industries? (3) As these industries have become 
more global, what have been the trends in their U.S.-based activities? 

What GAO Found: 

The U.S. semiconductor industry began offshoring labor-intensive 
manufacturing operations in the 1960s, followed in the 1970s and 1980s 
by increasingly complex operations, including wafer fabrication and 
some research and development (R&D) and design work. Semiconductor 
assembly and testing was the first to move to Asia, followed by 
fabrication and, more recently, by some design operations. Software 
services offshoring began in the 1990s after Internet communications 
made it possible to trade services such as software programming and 
software design. The year 2000 changeover hastened this offshoring 
trend related to software services because programmers knowledgeable in 
the appropriate programming languages were available, primarily in 
India. In the 2000s, firms further expanded their offshoring 
operations, based on the low-cost and high-quality work from the 
offshored services undertaken in the late 1990s. 

Although a lower labor cost was initially a key factor that attracted 
firms to offshore locations, other factors such as technological 
advances, available skilled workers, and foreign government policy, 
also played roles. Technological advances helped firms in the 
semiconductor industry improve their management of global supply chains 
and logistics. Regarding software services, technological advances 
opened the way to trade in programming and other software services. 
Foreign government policies in Taiwan and China created favorable 
investment conditions for U.S. semiconductor firms. India changed its 
emphasis from state-owned enterprises in the 1970s to an environment 
more amenable to private enterprise by the mid-1980s. Although its 
restrictions on foreign investment constrained the software services 
industry’s overall development, India established software technology 
parks in 1990 to give domestic firms preferential access to the 
infrastructure essential for offshored operations. 

Although offshoring continues to grow in both the semiconductor 
manufacturing and software services industries, the United States 
remains one of the largest and most advanced producers of 
semiconductors and software services. U.S. production data show that 
both industries have largely rebounded from the 2001 recession. 
Employment data show a mixed picture, with semiconductor employment 
remaining flat and software employment mostly recovering. The United 
States has global trade surpluses in the semiconductors and software 
services sectors, although production is increasingly shifting to Asia. 
Both U.S. industries have become global, sourcing components from many 
locations overseas. U.S. firms have offshored increasingly complex 
products, essentially moving up the value chain. The ability of the 
United States to compete depends on research and development 
investment, innovative academic environments attracting top-quality 
students, and a competitive business environment. It will be important 
for U.S. businesses and policymakers to keep alert to technological 
changes and competitor countries’ strategies while enhancing the 
elements of the innovation environment in the United States. 

What GAO Recommends: 

GAO makes no recommendations in this report. 

GAO provided copies of our draft report to the Departments of State and 
Commerce. The Department of State did not provide comments; the 
Department of Commerce agreed with our findings. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-423]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Loren Yager at (202) 512-
4128 or yagerl@gao.gov. 

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

U.S. Firms Continue to Offshore Increasingly Complex Semiconductor 
Manufacturing Activities and Software Services: 

Technological Advances, Availability of Talented Human Capital, and 
Foreign Government Policies Contributed to Increased Offshoring of 
Semiconductor Manufacturing and Software Services: 

The United States Continues to Be a Global Leader in the Development of 
Semiconductors and Software at the Most Advanced Levels: 

Concluding Observations: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Scope and Methodology: 

Appendix II: U.S. Multinational Companies' Investment and Operations in 
the Semiconductor and Software Industries: 

Appendix III: Larger Imports of Information and Communication Goods 
Drive the U.S. Advanced Technology Product Deficit: 

Appendix IV: Comments from the Department of Commerce: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Many Factors Contributed to a Favorable Environment for 
Offshoring in Semiconductors and Software Services: 

Table 2: Changes in Hourly Wage and Employment for U.S. Computer 
Specialist Occupations: 

Table 3: Share of U.S. Foreign Affiliates' Employment in Total U.S. MNC 
Employment Worldwide--ICT Sector Industries, 1999-2003: 

Table 4: U.S. Companies' Foreign Affiliates' Share of Total R&D 
Expenditures: 

Table 5: Share of Selected Industries in Total MOFA R&D Expenditures: 

Table 6: Share of U.S. Companies' Foreign Affiliates' R&D Expenditures, 
by Industry for Selected Asia-Pacific Economies, 2003: 

Figures: 

Figure 1: Annual Growth in Real Value-Added by Industry Group, 2002-
2004: 

Figure 2: Semiconductor Manufacturing Trends, 1960-2005: 

Figure 3: Value-added Trend for U.S. Semiconductor and Related Device 
Manufacturing, 1987-2004: 

Figure 4: Employment Trend for Semiconductors and Related Devices 
Industry, 1972-2005:  

Figure 5: Labor Productivity, Employment and Compensation Trends in 
Semiconductors and Electronic Components Manufacturing, 1988-2004: 

Figure 6: U.S. Imports and Exports of Semiconductors with All 
Countries, 1985-2005: 

Figure 7: Chinese Imports of Semiconductors by Country, 1995-2005: 

Figure 8: U.S. Software Industry Revenues, 1990-2004: 

Figure 9: Projected Rate of Job Growth for Computer Specialist 
Occupations, 2004-2014: 

Figure 10: U.S. Unaffiliated Exports and Imports in Computer and Data 
Processing Services, 1986-2004: 

Figure 11: U.S. Exports of Software, 1998-2004: 

Figure 12: Gross Domestic Expenditures on Research and Development by 
Country, 1990-2004: 

Figure 13: U.S. Direct Investment Abroad in the Computers and 
Electronic Products Industry, Selected Asian Countries, 1999-2004: 

Figure 14: Value-added in Semiconductors--U.S. Parents and MOFAs 
(including Asia-Pacific, excluding Japan and Australia):  

Figure 15: U.S. ATP Information and Communications Trade with China: 

Figure 16: U.S. ATP Electronics Trade with China: 

Abbreviations: 

ACM: Association of Computing Machinery: 

ATP: Advanced Technology Products: 

BEA: Bureau of Economic Analysis: 

BLS: Bureau of Labor Statistics: 

CMM: Capability Maturity Model: 

CMMI: Capability Maturity Model-Integration: 

EU-25: European Union: 

FDI: foreign direct investment: 

ICT: Information and Communications Technology: 

IDM: Integrated Device Manufacturer: 

IT: information technology: 

MOFA: majority-owned foreign affiliates: 

MNC: multinational company: 

NAICS: North American Industry Classification System: 

PPP: purchasing power parity: 

R&D: research and development: 

SIA: Semiconductor Industry Association: 

SIC: Standard Industrial Classification: 

[End of Section] 

September 7, 2006: 

Congressional Committees: 

Foreign competition over the last several decades has contributed to a 
decline in U.S. manufacturing employment, while U.S. firms have also 
moved some production activities to foreign locations in order to 
reduce costs or gain access to foreign markets. Concerns about U.S. 
manufacturing job losses have been allayed somewhat by the prospect of 
large numbers of high paying jobs developing in U.S. knowledge-based 
services industries, such as in the information technology (IT) sector. 
However, some types of knowledge-based services have become more easily 
tradable within the past 10 years due to the spread of the Internet, 
and concerns have now also arisen about what the offshoring of these 
types of activities may mean for the United States. 

In response to widespread congressional interest, we have undertaken a 
body of work related to offshoring under the Comptroller General's 
authority to conduct evaluations on his own initiative. In this report, 
one in a series of reports on services offshoring,[Footnote 1] we 
address offshoring trends in two important U.S. information technology 
industries--semiconductor manufacturing and software services. To 
analyze the U.S. semiconductor and U.S. software industries' 
experiences with offshoring, we addressed the following questions: 

* How has offshoring in semiconductor manufacturing and software 
services developed over time? 

* What factors enabled the expansion of offshoring in these industries? 

* As these industries have become more global, what have been the 
trends in their U.S.-based activities? 

To answer these questions, we analyzed data and other research to 
develop a broad understanding of these industries. We conducted 
research on how these industries developed offshoring relationships in 
specific countries--Taiwan and China for semiconductor manufacturing 
and India for software services. We examined the available literature 
on both industries; analyzed U.S. government data on foreign investment 
and trade in these industries; and interviewed representatives from 
firms and private sector associations, as well as industry analysts in 
the United States, Taiwan, China, and India. We conducted our analysis 
in accordance with generally accepted government auditing standards 
from October 2005 through August 2006. A detailed description of our 
methodology appears in appendix I. 

Results in Brief: 

Over the past 40 years, the extent and complexity of semiconductor 
manufacturing and software services offshoring have grown as U.S. firms 
sought low-cost, high-quality workers in response to commercial 
competition. In the 1960s, U.S. firms offshored the labor-intensive 
stages of semiconductor manufacturing to make use of low-cost, 
unskilled foreign labor and to gain access to foreign markets. They 
maintained capital-intensive, highly-skilled wafer fabrication and 
design in the United States and offshored assembly operations for 
products generally destined for the U.S. market. In the 1980s, 
semiconductor firms moved some wafer fabrication activities to Asian 
contract manufacturers to reduce financial risk. Taiwan was a key 
offshore location for U.S. semiconductor manufacturers, initially for 
assembly and testing and later for fabrication. As China opens its 
market, Taiwan manufacturers are transferring some operations there, 
furthering China's role as a rising player in the industry. More 
recently, U.S. firms have offshored more complex research and design 
activities; they have also sought to take advantage of Asian 
engineering talent and to target rapidly growing Asian markets. In the 
area of software services, firms began to offshore operations in the 
mid-1990s due to the need for skilled labor and cost reduction. 
Offshoring of software programming work, in particular, expanded in the 
late 1990s with the need for additional programmers to prepare for the 
year 2000 changeover. As telecommunications infrastructure expanded 
overseas and foreign countries liberalized their economies in the 
1990s, firms turned to software programmers in other countries, such as 
India and Ireland. As firms experienced cost savings and observed high- 
quality work in these offshore locations, they expanded offshore 
operations to include more advanced operations, such as software design 
and systems integration. 

Although a lower labor cost was initially a key factor that attracted 
U.S. companies to many offshore locations, other factors such as 
technological advances, available human capital, and foreign government 
incentives were also important to the expansion of offshoring. For 
firms in the semiconductor industry, technological advances enabled 
improved management of their global supply chains. For example, 
sophisticated communication and product tracking technologies made 
possible efficient international product delivery systems. The 
development of telecommunications technology initially enabled software 
services firms to offshore basic software programming services. Such 
technology changes led firms in each industry to extend their basic 
business model to include global teams spread across multiple regions 
of the world and comprising foreign workers with high- quality skills. 
U.S. firms' offshoring decisions also have been affected by a variety 
of foreign government policies. Semiconductor firms responded to the 
Taiwan government's incentives and to China's policies aimed at 
attracting semiconductor industry investments. Software services firms 
benefited from the lifting of certain Indian government restrictions 
and from incentives offered by India. Nevertheless, firms also 
encounter risk factors in offshoring; among these are geopolitical 
risks, the quality of infrastructure, and the absence of legal 
protection for intellectual property rights. 

Despite the growing scope and sophistication of offshore activities, 
the United States continues to be one of the largest and most advanced 
producers of both semiconductors and software. U.S. companies are 
leaders in both industries, while foreign companies have established 
their own operations in the United States to access U.S. technology, 
skilled labor, and market. Although both semiconductor and software 
industries faced a downturn during the 2001 recession, U.S. production 
data show that they have generally rebounded and are growing. 
Employment data show a mixed story, with semiconductor employment 
remaining relatively flat and software employment rebounding. Trade 
data indicate that the United States has global surpluses in both 
semiconductors and software, although production is increasingly 
shifting to Asia. More broadly, the United States maintains several 
strengths that help foster and commercialize innovations in high 
technology sectors such as semiconductors and software. These include 
its higher education system, spending on research and development, and 
a competitive business environment. 

In this report, we make some observations comparing the offshoring 
experiences in semiconductor manufacturing and software services. We 
note the importance both of understanding the implications of rising 
foreign competition and technology change and of enhancing traditional 
U.S. strengths in areas supporting innovation and new commercial 
applications. 

We received written comments on a draft of our report from the 
Department of Commerce, which generally agreed with our finding. (See 
app. IV.) 

Background: 

"Offshoring" generally refers to an organization's replacement of goods 
and services produced domestically with imports from foreign 
sources.[Footnote 2] For example, if a U.S.-based company decides to 
move its computer programming activities to an overseas supplier, this 
would be considered offshoring. The overseas supplier may be an 
affiliate of the company, in which case the company has also invested 
overseas. In contrast, the supplier may be unrelated to the domestic 
company, in which case the company has outsourced its computer 
programming activities, as well as offshored them. 

Semiconductors are devices that enable computers and other products 
such as telecommunication systems to store and process information. 
Semiconductor device fabrication is the process used to create "chips," 
the integrated circuits that are present in everyday electrical and 
electronic products. It is a multiple-step sequence of photographic and 
chemical processing steps during which electronic circuits are 
gradually created on a wafer made of pure semiconducting material, most 
commonly silicon. Improvement in the performance of increasingly 
sophisticated electronics products depends on more powerful 
semiconductors that can store more information and process it faster. 
Demand for semiconductors is driven by the demand for computers and 
communications products that use them. 

The semiconductor manufacturing process can be divided into three 
distinct stages: (1) design of the semiconductor integrated circuit, 
(2) fabrication of the semiconductor wafer, and (3) assembly and 
testing of the finished integrated circuit. The design and fabrication 
processes are the most capital-intensive, while the assembly and 
testing process tends to be more labor-intensive, although still 
relatively technologically sophisticated. For example, semiconductors 
are designed by computer engineers with the assistance of advanced 
software. They are then fabricated using chemicals, gases, and 
materials combined in an intricate series of operations using complex 
manufacturing equipment to produce wafers containing a large number of 
chips. During assembly, the chips are assembled into the finished 
semiconductor components and tested for defects. The finished 
semiconductor consists of millions of transistors and other microscopic 
components. 

The technological complexity of semiconductors is indicated by the 
diameter of the wafer and the density of the etched lines (feature 
size) on the wafer. The size of the wafer is an important element 
because the number of chips per wafer increases dramatically as the 
wafer size increases. The current leading-edge manufacturers produce 12-
inch (300 millimeters) wafers.[Footnote 3] Smaller feature size 
measured in microns allows for more components to be integrated on a 
single semiconductor, thus creating more powerful semiconductors. Each 
reduction in feature size--from 0.35 micron to 0.25 micron, for 
example--is considered a move to greater technological sophistication. 

The software services industry also includes several types of services 
and levels of technological sophistication. Software services include 
writing individual software programs or combined "modules;" supporting 
these programs and modules once they are installed on computers; 
designing software networks, which might include various software 
programs, as well as systems of networks; integrating and maintaining 
these networks and systems as they are applied to clients' tasks; and 
managing and operating clients' overall computer systems. 

Software services are now broadly diffused throughout the U.S. economy. 
Firms across most industries now use some form of software services-- 
whether it is basic accounting software, inventory control software, or 
a much more complex software product applied to manufacturing 
operations. Automobile companies, for example, use advanced computer 
software in the design of new car models, on production lines that 
manufacture these cars, and in the cars themselves that now contain 
electronic components. 

Software services generally range in complexity from routine software 
programming and testing to complex software programming, software 
project management, and higher-end software systems integration, 
architecture, and research. In general, software programs and modules 
can be produced in various locations; integrating these requires some 
focal points capable of working closely with the various locations. 

Both semiconductor manufacturing and software services are key 
industries within the broader information and communications technology 
(ICT) sector; they have contributed significantly to overall U.S. 
growth and productivity. For example, semiconductor and related device 
manufacturing in the United States represents about 24 percent of the 
total value of the ICT sector's computer and electronic products 
manufacturing. Software services comprise about 48 percent of the total 
production of the categories of services industries included in the 
broader ICT sector--publishing industries (includes software), 
information and data processing services, and computer systems design 
and related services (averaged over 1990 to 2004). 

Although the ICT sector represents a small share of the overall U.S. 
economy (about 4 percent), it has contributed significantly to U.S. 
economic expansion. According to the Department of Commerce's Bureau of 
Economic Analysis (BEA), the ICT sector accounted for about 11 percent 
of total economywide value-added growth in 2004. Examining value-added 
growth is a useful way to compare growth rates across industries 
because it measures only the increase in output due to that industry, 
excluding any inputs or materials from other industries. Therefore, 
value-added growth measures the changes in output due to increases in 
factors such as labor and capital and to improvements in the 
productivity of those factors. Figure 1 shows that, from 2002 to 2004, 
the ICT sector's growth in real value added accelerated more than any 
other industry group. Although the ICT sector's growth slowed in 2001 
during the recession, annual real growth has recently accelerated from 
2.0 percent in 2002, to 6.7 percent in 2003, and to 12.9 percent in 
2004. 

Figure 1: Annual Growth in Real Value-Added by Industry Group, 2002- 
2004: 

[See PDF for image] 

Source: BEA. 

[End of figure] - graphic text: 

The ICT sector also contributes to productivity in the rest of the 
economy. For example, other manufacturing and services sectors, such as 
automobiles and banking, have become more productive as they have used 
the latest products and advances from the ICT sector. Economic research 
has generally found that the investments made in ICT sector products by 
other industries contributed to a rapid economywide increase in 
productivity during the 1990s.[Footnote 4] In addition, the 
technological advances and competition within the sector have resulted 
in declining prices and rising performance in ICT products. This, in 
turn, has contributed to lower rates of inflation throughout the 
economy as other sectors benefit from these improvements. 

We present information on multinational companies' global operations in 
semiconductor and software services in appendix II. 

U.S. Firms Continue to Offshore Increasingly Complex Semiconductor 
Manufacturing Activities and Software Services: 

The U.S. semiconductor industry has foreign operations in several 
locations, notably in Taiwan and China. The U.S. software services 
industry has turned to India for a significant share of its offshoring 
operations. The types of semiconductor manufacturing and software 
services that U.S. firms have offshored to Taiwan, China, and India 
have become more complex over time. U.S. semiconductor firms first 
offshored labor-intensive assembly operations in the 1960s, then wafer 
fabrication, and more recently, higher value-added activities, such as 
advanced fabrication and design. The offshoring of software services 
largely began in the 1990s in preparation for the year 2000 transition. 
Much like semiconductor products, the types of software services that 
firms have offshored have become progressively more complex as firms 
expanded their offshore operations to customized applications requiring 
highly skilled workers. 

Semiconductor Manufacturing Moved Offshore as Competition from Other 
Countries Developed; Firms Offshored More Complex Production Over Time: 

Offshoring in semiconductor manufacturing began in the 1960s with labor-
intensive manufacturing activities, such as assembly. U.S. firms 
invested in overseas manufacturing facilities to perform the labor- 
intensive assembly of semiconductors for export to the United States. 
Firms domestically sourced the design and fabrication of higher- 
skilled, more capital-intensive semiconductor manufacturing activities 
and then shipped the semiconductors to Asia for assembly. The finished 
semiconductors were returned to the United States for final testing and 
shipment to the customer. According to some industry experts, 
offshoring of assembly work kept the U.S. semiconductor industry cost- 
competitive as new foreign rivals emerged in countries such as Japan. 

The overall U.S. business models for semiconductor manufacturing 
changed in the 1980s. Two types of company models developed for 
semiconductor production. Some companies, known as Integrated Device 
Manufacturers (IDMs), conduct their own research, produce their own 
designs, and operate their own fabrication plants to produce 
semiconductor wafers.[Footnote 5] Other companies, known as fabless 
design firms, develop their own designs and contract with independent 
fabrication plants, known as foundries, to produce their wafers. 
Foundries emerged during the 1980s as firms in Asia, particularly 
Taiwan, began to specialize in wafer fabrication. With the emergence of 
overseas foundries, U.S. firms developed global supply chains for 
sourcing different parts of the semiconductor production process over 
multiple global locations. They continued to design in the United 
States and other developed countries, while contracting with foundries 
in Taiwan to perform capital-intensive wafer fabrication. They also 
continued domestic fabrication, but Asian countries increased their 
share of overall production--with Taiwan expanding as a major supplier 
of fabrication services and China emerging as a new source of 
fabrication services in the late 1990s. 

In recent years, some U.S. firms have offshored increasingly complex 
semiconductor fabrication and design activities--essentially going up 
the value chain (see fig. 2). As firms in other countries, notably 
Taiwan, became more adept at producing more complex semiconductors, 
U.S. firms increasingly turned to offshore manufacturers to produce 
these semiconductors. The most complex semiconductors now manufactured 
in fabrication plants (commonly called fabs) are 12-inch (300 
millimeter) wafers with submicron feature size. U.S. firms were leaders 
in developing 12-inch wafers. According to industry experts, firms have 
offshored design services to Taiwan due, in part, to maintain close 
contact with Asian customers to meet their specific requirements. Also, 
as semiconductor manufacturing becomes more complex, some experts have 
noted, it becomes all the more important to develop close relationships 
among design and manufacturing activities, so as to enable feedback 
discussions. 

Figure 2: Semiconductor Manufacturing Trends, 1960-2005: 

[See PDF for image] 

Sources: GAO (data); MapArt (map). 

[End of figure] 

The gap in semiconductor manufacturing capabilities has narrowed 
between the United States and Taiwan and China. Currently, Taiwanese 
and Chinese foundries are capable of producing technologically 
sophisticated semiconductors. For example, Taiwanese foundries are now 
capable of producing integrated circuits as small as 0.09 microns, and 
some Taiwanese firms provide design services to support this level of 
semiconductor technology. In addition, according to industry experts, 
the newest semiconductor manufacturing facilities in China are capable 
of producing integrated circuits up to 0.13 microns in size, with one 
Chinese foundry known to be producing circuits at the 0.09 micron size. 
Thus, currently the most advanced manufacturing facilities in Taiwan 
and China manufacture integrated circuits that are only one generation 
or less behind state of the art. 

U.S. Firms Offshored Software Services in the Mid-1990s and 
Increasingly Offshore More Complex Activities: 

The software services industry was one of the first services industries 
to offshore significant activities as U.S. firms recruited foreign 
software programmers, particularly in India. Before the widespread use 
of the Internet, it was not economical to export software. U.S. firms 
either invested in overseas affiliates in India to directly provide 
software services for the firm or hired Indian programmers to work 
temporarily on-site at firms' U.S. locations. Beginning in the 1990s, 
Internet communications combined with the availability of satellite 
connections and reduced telecommunication costs made it possible for 
foreign software programmers to remain abroad while working for U.S. 
clients. Many types of U.S. firms began re-engineering their business 
processes to concentrate on core competencies and outsource or offshore 
other activities, such as writing software programs. The offshored 
activities were those that could be reduced to step-by-step 
instructions, digitized, and performed at a distance. 

In the late 1990s, preparations for the year 2000 changeover 
contributed to U.S. firms' further use of foreign software programmers 
who were knowledgeable in certain programming languages. U.S. firms 
turned not only to foreign software programmers who were temporarily 
employed in the United States but also to programmers overseas, 
particularly in India, who provided work directly to U.S. clients. In 
recent years, U.S. firms have offshored increasingly complex software 
services, going up the value chain as occurred in the semiconductor 
industry. Examples of less sophisticated software services are 
operations involving basic computer language coding or programming and 
managing computer databases. More complex offshored services include 
advanced software design and development activities and researching, 
designing, developing, and testing new software technology. 

U.S. firms experienced high-quality work in offshore locations; for 
example, they discovered that firms in India have the capabilities to 
produce high-end software services, such as software design at a low 
cost. In addition, firms often combine highly skilled labor available 
in India with skilled labor in other countries to create global teams 
with specific skill sets. For example, one firm in India stated that a 
firm might begin a high-end software development project in India and 
then transfer the work to a team in Ireland for further development 
before delivery to a U.S. client. Firms also use global teams to better 
serve local markets worldwide by providing customized programming 
services to local clients. 

Currently, the types of offshored software services activities now 
include advanced software engineering and research and development. For 
example, in recent years Indian and multinational firms, including U.S. 
affiliates, have established high-technology research and design 
facilities in India to perform such high-end software services as 
software engineering and software product development. According to 
software services industry experts in India, many of these facilities 
employ hundreds of software engineers to develop and test a wide range 
of new high-end software designs and products for export to global 
customers. Some firms in India stated that the quality of high-end 
software design and development activities in India, combined with 
firms' need to introduce new products and new technologies, have 
attracted increasing interest in offshoring software development to 
India. Nevertheless, the bulk of offshored software services in India 
can be characterized as lower-level work, mostly in the applications 
development segment of the industry. Applications development primarily 
requires programming skills and has limited face-to-face interaction. 
Moreover, applications development can easily be segmented and 
standardized, features that characterize offshoring software services. 

Technological Advances, Availability of Talented Human Capital, and 
Foreign Government Policies Contributed to Increased Offshoring of 
Semiconductor Manufacturing and Software Services: 

The combination of technological advances, available human capital, and 
foreign government policies has created a favorable environment for 
offshoring. Many firms in semiconductor manufacturing and software 
services use offshoring in their business models to increase their 
global competitiveness by lowering costs and gaining access to foreign 
markets. Advances in telecommunications enabled semiconductor firms to 
improve their logistics and inventory controls; they also were 
particularly important to the offshoring of software services. Firms in 
both sectors initially sought low-cost labor, but they expanded the 
scope of their offshoring activities as they discovered and helped 
develop highly educated workforces in Taiwan, China, and India. Foreign 
government policies played different roles in the countries we visited. 
In Taiwan and China, the national governments pursued various 
industrial policies to promote semiconductor manufacturing and, in 
India, the loosening of regulations and the availability of government- 
supported software technology parks afforded the software industry 
opportunities to grow relatively unregulated. Although offshoring 
conveys benefits to firms that choose to locate operations overseas, it 
also encompasses business risks that challenge management skill. See 
table 1 for an overview of the factors that have contributed to 
increased offshoring. 

Table 1: Many Factors Contributed to a Favorable Environment for 
Offshoring in Semiconductors and Software Services: 

Factors: Technology: Computer-related infrastructure; 
Semiconductors: (Taiwan, China): Inventory control, radio frequency 
identification of products, logistics improvement; 
Software: (India): Telecommunications and broadband capacity 
improvements. 

Factors: Technology: Physical infrastructure; 
Semiconductors: (Taiwan, China): Roads, ports, trucking improvements; 
Software: (India): Fiber optics.  

Factors: Human capital: Workers; 
Semiconductors: (Taiwan, China): Assembly workers with less education; 
research and development and design professionals with higher 
education; 
Software: (India): Well-educated IT workers. 

Factors: Human capital: English language ability; 
Semiconductors: (Taiwan, China): English not required; 
Software: (India): English essential. 

Factors: Human capital: Cost of human capital; 
Semiconductors: (Taiwan, China): Wage rates lower than U.S. wage rates; 
labor costs represent a small share of fabrication plants; 
Software: (India): Wage rates lower than U.S. wage rates; demand is 
causing wages to increase. 

Factors: Government policies: Education/training; 
Semiconductors: (Taiwan, China): Vocational training emphasized; 
Software: (India): Government promoted college education as a cultural 
value. 

Factors: Government policies: Investment incentives; 
Semiconductors: (Taiwan, China): Various incentives available in 
science parks; government shares risk; China used a preferential value-
added tax incentive to attract investment in the early 2000s; 
Software: (India): Software technology parks include income tax 
credits, duty-free entry of capital goods, and access to high-speed 
telecommunications. 

Factors: Government policies: Favorable tax/ land policies; 
Semiconductors: (Taiwan, China): Offered by regional governments; 
Software: (India): Less prevalent generally, but favorable leasing 
terms are available in science parks. 

Factors: Government policies: Private sector regulation; 
Semiconductors: (Taiwan, China): Highly regulated, licensing required; 
Software: (India): Software less regulated than some other private 
industry; private entrepreneurship is the prevailing model. 

Source: GAO. 

[End of table] 

Technology Launched Important Changes in Semiconductors Manufacturing 
and Software Services: 

Improvements in telecommunication technology helped to expand the 
degree of offshoring in both semiconductor manufacturing and software 
services. With improved communications, U.S. semiconductor firms were 
able to create tighter linkages with overseas suppliers, and software 
services firms developed global teams that could transfer digitized 
information over the Internet. 

Technology Improvements Allowed Semiconductor Firms to Develop More 
Efficient Global Supply Chains: 

Semiconductor manufacturing firms improved their management of supply 
chains through better telecommunications, logistics management, and 
modern transportation. Telecommunications has allowed better monitoring 
of the movement of products. For example, foundries in Taiwan use 
Internet-enabled software that allows real-time communication between 
engineering teams in different locations. Some U.S. companies use radio-
frequency identification tags in Taiwan and China to track products 
shipped from these manufacturing locations to distribution centers in 
other countries. According to a representative of one U.S. firm, this 
technology has reduced the need for inventory sourcing redundancy, thus 
reducing inventory cost and the associated employment costs. 

Logistics management is an important part of global business. Taiwan's 
competitive logistics industry has offered advanced computerized 
systems that assist in the management of purchasing, storage, delivery, 
and distribution of products. According to a Taiwan government 
official, Taiwanese companies can provide production orders to their 
clients in 2 days. According to an industry researcher, the automation 
of the semiconductor assembly process also has improved efficiency in 
the overall semiconductor infrastructure, such as packaging facilities. 

Modern transportation options using more powerful computer systems, 
advanced software, and telecommunications make faster delivery 
possible. Countries are upgrading all elements of their transportation 
infrastructure--airports, seaports, modern roads, and trucking. Because 
a product may travel around the world more than once during the 
production process, efficient transportation systems are essential. For 
example, China has made numerous improvements to its transportation 
infrastructure to permit more efficient distribution. According to one 
Internet firm operating in China, the transportation infrastructure 
within China for delivering the physical products to customers--an 
essential component for online auction sites--did not exist before the 
year 2000. China reportedly invested $30 billion in 2004 alone to 
improve its network of roadways. 

The Software Services Industry Changed Its Global Business Model: 

In the software services sector, telecommunications improvements have 
changed the types of software services traded, the way the work is 
done, and the telecommunications investments made. 

First, the essential advance in IT--the introduction of Internet 
communications--made it possible to trade some services that were 
previously not tradable. For example, software programs written in 
standardized programming languages could be digitized and transferred 
worldwide over the Internet. 

Second, global teams have become common elements of firms' business 
strategies. The ability to transmit data electronically made it 
possible to specify an application in one firm and develop it in 
another. Because of the availability of the Internet, teams can work 7 
days a week, 24 hours per day to meet customer needs worldwide. These 
teams' operations could be set up relatively quickly with office space, 
utilities, and communication tools, such as personal computers with 
broadband access. The ease of undertaking this type of offshoring has 
led to an escalating use of offshored IT services, including but not 
limited to software programming. According to one research firm, the 
value of IT offshoring and business process offshoring totaled $34 
billion in 2005 and could double by 2007. 

Finally, the services offshoring model has required investments in 
global telecommunications infrastructure, such as wired landline and 
satellite communication services. India has made the investments to 
facilitate the telecommunications industry. According to the government 
of India, in 2005, 47 million landline connections and 65 million 
satellite connections existed in India. Moreover, in 2004, after the 
telecommunication sectors declined due to overcapacity, one major 
Indian telecommunications services firm, partly owned by the government 
of India, purchased a large, privately owned U.S. undersea fiber-optic 
network linking Asia, Europe, and North America after receiving 
national security approval from the U.S. government. This acquisition 
strengthened India's control of low-cost telecommunications 
infrastructure. According to an Indian government official and several 
U.S. companies operating in India, the growth in telecommunications 
infrastructure has also enabled firms to move from India's major cities 
to smaller, lower-cost surrounding cities. 

The Availability of Human Capital Was Key to the Expansion of 
Offshoring in Both Semiconductor Manufacturing and Software Services: 

The availability of high-quality workers overseas has been an essential 
component of the increased use of offshoring for firms in the 
semiconductor manufacturing and software services sectors. Through 
experience and training, the talent pool in several countries 
demonstrated their value to firms seeking skilled workers to perform 
tasks with various degrees of complexity. 

Some Semiconductor Firms Turned to Low-Level Skilled Foreign Workers 
Initially but Gradually Offshored More Complex Work to Higher-Skilled 
Labor Forces Overseas: 

Access to human capital played an important role in the relocation of 
semiconductor manufacturing firms to Taiwan and China, especially as 
the need for skilled labor arose, and a quality workforce emerged in 
these countries. During the earlier phase of semiconductor offshoring 
in Taiwan, workers did not need advanced training. Taiwan emphasized 
vocational training during this period. Industry experts stated that, 
although lower-cost labor was initially attractive for assembly, the 
labor costs component in semiconductor manufacturing is not a decisive 
factor for companies' location decisions overseas.[Footnote 6] New 
technology has computerized the entire production process, leading to a 
reduced need for labor and an increased need for skilled workers and 
managers. According to the representative of one research firm, the 
quality of the Chinese and Taiwanese workforce makes it easy to train 
and retain workers in semiconductor assembly and manufacturing. 

Taiwan, China, and India are each able to provide a quality workforce, 
with a plentiful supply of engineers including emigrants who have 
returned to work in their home countries. Highly trained professionals 
with experience in U.S. firms assisted the development in each of these 
three countries of their semiconductor and software industries. 
According to one research firm, more than 5,000 overseas students and 
professionals return to China each year, bringing with them Western 
knowledge and skills.[Footnote 7] For example, several firms operating 
in China told us that Chinese returnees who have studied or worked 
abroad are an important part of their staffs. India, Taiwan, and China 
are each graduating IT and other engineers in large numbers. For 
example, China's potential supply of engineers is large; according to 
one U.S. study, the number of Chinese engineering graduates with 
bachelor's degrees in 2004 numbered 351,537, as compared with 137,437 
in the United States.[Footnote 8] Moreover, engineers in Taiwan, China, 
and India typically earn less than their counterparts in the United 
States. For example, Taiwan's domestic supply of engineers can be hired 
at approximately half the cost of engineers in the United States. 

Software Services Firms Find a Large Supply of Human Capital Overseas 
with Top Quality Skills: 

We reported in 2004 that access to human capital, particularly lower- 
wage skilled labor, an educated workforce, and quality local vendors 
facilitated software services offshoring. India is the leading example 
of this trend. For example, Indian wages represent a fraction of the 
cost of hiring U.S. counterparts, with the salaries for Indian IT 
engineers starting at $5,000. According to industry experts, the 
increasing demand for these workers is causing salary rates to increase 
somewhat. Yet lower wages does not tell the entire story because India 
also provides a skilled workforce. India's leading software services 
association reports that 44 percent of India's services professionals 
possess at least 3 years of work experience. Moreover, many Indian 
nationals who studied computer technology in the United States and 
gained experience with U.S. IT firms have begun to return to India to 
pursue career opportunities in their native country. Some of these 
individuals have gone on to create or lead successful firms in India. 

India has a strong national emphasis on advanced technical education, 
and its scientific and educational institutions produce well-trained 
scientists and engineers. The highly competitive Indian Institutes of 
Technology trains the upper echelon of talented students and, according 
to one industry researcher, produces highly skilled engineers with 
capabilities that match or exceed U.S. talent. In addition, an industry 
researcher in India stated that nontechnical programs are beginning to 
offer computer science and software programming courses to prepare 
students to meet the market demand of the software services sector. 
According to India's software services association, of the 215,000 
engineering graduates in 2003 to 2004, 141,000 specialized in IT (e.g., 
computer science, electronics, and telecommunications).[Footnote 9] 
India's use of the English language gives it a further advantage, 
making India a prime destination for services offshoring. 

Finally, the quality of the firms in India is another factor that is 
considered when firms decide to offshore services. The quality of local 
vendors, many with Capability Maturity Model (CMM) certifications, 
provides a sense of security to firms seeking to offshore software 
services to India.[Footnote 10] According to a business association in 
India, Indian companies work to attain these certifications to 
demonstrate the high quality of their work. For example, a business 
representative told us that more than 50 percent of the companies that 
have CMM Level 5 certifications are located in India. With the update 
of the CMM to the Capability Maturity Model-Integration (CMMI), the 
Software Engineering Institute reports 93 Indian and 74 U.S. entities 
(41 percent and 32 percent, respectively, of the world total) with CMMI 
certifications as of March 2006. 

Foreign Government Policies Have Made Foreign Investment Attractive for 
Semiconductor Firms and Left the Software Services Industry Relatively 
Unregulated: 

Foreign government policies contributed to the development of dynamic 
semiconductor and software services sectors with opportunities for U.S. 
firms to offshore. The governments of Taiwan and China developed a 
broad range of policies to promote their respective indigenous 
semiconductor industries and to attract investment, technology and 
talent from abroad. India, in its transition from a socialist 
government to a market-based economy, has liberalized its software 
services market, thus permitting U.S. firms to access India's low-cost 
high-quality workforce. 

Government Policies in Taiwan and China Have Assisted Their Respective 
Semiconductor Industries: 

Taiwan has long pursued industrial policy to encourage the domestic 
development of science and technology. In 1972, it established a 
national research institute and within that organization an office to 
develop its semiconductor industry. Drawing upon the expertise of a 
U.S. advisory group, Taiwan successfully duplicated elements of the 
Silicon Valley technology cluster by establishing science-based 
industrial parks that brought together major universities, research 
labs, and a dynamic venture capital industry. Its universities feature 
programs sponsoring research specific to semiconductors, and the 
government targeted financial and tax incentives to the semiconductor 
industry. The government also emphasizes vocational training to develop 
quality resources. As a result, the government of Taiwan helped 
position its semiconductor industry as an effective contract supplier 
integral to the U.S. semiconductor supply chain. Its industrial 
strategy, which has been characterized as "close 
followership,"[Footnote 11] integrated Taiwan's industry operations 
with those of U.S. companies. Although this strategy means that 
Taiwan's industry may be a step behind the U.S. industry, firms in 
Taiwan capture high-technology industrial and research functions. As a 
result of its efforts, Taiwan is now a leading semiconductor producer 
with top-level manufacturing expertise. 

Taiwan's support of a strong semiconductor sector continues to evolve 
with a project that focuses on integrated circuits manufacturing 
infrastructure. The government is providing partial financial support 
to this project, which includes the expansion of university-based 
training, investments in new technologies, and a design park to focus 
on system-on-a-chip design.[Footnote 12] With added pressure from the 
opening of China's market and the competition from Chinese firms, 
Taiwan is revisiting its restrictions on the level of technology that 
firms may transfer to mainland China.[Footnote 13] In April 2006, 
Taiwan announced it was removing restriction of the export of low-end 
semiconductor packaging and testing technology to China. 

China's current policies have helped its semiconductor sector to grow 
dramatically since 2000, but its wafer production represents a 
relatively small percentage of worldwide production. Nevertheless, 
China is considered a rising player in the field of advanced 
technology. Prior to 2004, China's differential value-added tax, since 
normalized,[Footnote 14] was a notable policy that led to an influx of 
semiconductor firms into China --notably from Taiwan--that sought to 
avoid the impact of the tax. Following Taiwan's strategy, China is 
creating a modern infrastructure to support semiconductor operations. 
For example, the government provides tax incentives, preferential 
loans, and opportunities to locate in special economic zones and 
science parks. China announced, in 2006, the adoption of a 15-year 
national technology strategy to develop, among other things, a world- 
class information sector and to focus on developing independent 
innovation. The result of China's policies is an expanding 
semiconductor sector that relies heavily on the expertise of Taiwan's 
managers and other expatriates whom China is actively recruiting to 
return to the mainland.[Footnote 15] 

India's Software Industry Was Not Subject to Many of India's 
Restrictive Policies: 

India's policy for software services differed from the deliberate 
industrial policy undertaken by Taiwan and China. India's government 
policy shifted from protection of domestic industries to a gradual 
liberalization of some regulations. Although India maintains 
significant controls on some industries, the software services sector 
was not affected by some of the most restrictive policies, given the 
small size of its enterprises. Entrepreneurs in the software services 
sector were able to build the industry based on the special attributes 
of India --its English-speaking population, its supply of IT 
professionals, and its favorable telecommunication infrastructure. 

Between the 1950s and 1980s, India generally protected domestic firms 
from foreign competition and undertook a policy of import substitution. 
India pursued policies that sought to support state-owned enterprises. 
Where private firms were permitted to operate, a cumbersome licensing 
bureaucracy controlled their operations. Initially prevented from 
expanding into higher value-added segments of the industry in the 
1980s, software services firms nevertheless found areas of 
specialization that the government did not restrict. In 1991, India 
experienced a shortage of foreign exchange, which required 
liberalization of its economy as a condition to gain support of the 
International Monetary Fund. This led to further deregulation, which 
enabled software services to expand. Moreover, in the 1990s, India 
introduced software technology parks, which are similar to export 
processing zones. Firms in these parks were given tax exemptions, 
access to high-speed satellite links, and reliable electric power. 
India's technical universities trained large numbers of engineers and 
specialists in their highly selective IT programs. Later reforms of 
foreign ownership rules, intellectual property protections, and venture 
capital policy further opened the way for trade in services. 

Other Factors Constrain U.S. Firms' Offshoring Decisions: 

Firms seeking to offshore also encounter risks, including unforeseen 
costs, geopolitical concerns, cultural differences, infrastructure 
adequacy, and foreign government requirements. The destination 
country's legal system and contract enforcement affect firms' decisions 
to offshore. Both the semiconductor and software services industries 
have specific concerns about countries' intellectual property 
protection for their products and make location decisions accordingly. 
It should also be noted that offshoring places higher demands on firms' 
internal management skills. Managers must be able to lead teams with 
cultural differences, establish metrics to assess contract performance, 
and manage teams located around the world, using telecommunications as 
a primary tool. Although firms have found some cost savings in labor, 
nevertheless, they have also found other management challenges that 
tend to moderate the overall cost savings. One recurrent concern of 
U.S. firms operating in China is the lack of middle managers with the 
combination of business training, business acumen, management skill, 
and creative thinking. 

The United States Continues to Be a Global Leader in the Development of 
Semiconductors and Software at the Most Advanced Levels: 

While offshore suppliers are playing a larger and more sophisticated 
role as the industries globalize, the U.S. semiconductor and software 
industries have remained technological leaders in the most advanced 
research and development (R&D) and design work, and the United States 
remains one of the largest producers globally of products in both 
industries. Available indicators on production, employment, and trade 
show that both of these industries have generally rebounded since the 
2001 recession and continue to grow. Traditionally, the U.S. economy 
has had several advantages that fostered strong semiconductor and 
software industries, including its highly competitive university 
system, talented labor pool, large domestic market for products, high 
levels of spending on R&D, and competitive business environment. 

The U.S. Semiconductor Industry, Rebounding from a Recent Recession, 
Continues to Be a Global Leader: 

Despite having offshored some semiconductor operations, the U.S. 
semiconductor industry remains a global leader in cutting-edge 
semiconductor chip design and fabrication. U.S. semiconductor 
production has begun to rise again after a sharp decline during the 
2001 recession. However, U.S. semiconductor employment, which also fell 
during this period, has remained relatively flat since 2003. U.S. 
exports have also remained flat, but imports declined more sharply 
creating a U.S. trade surplus in semiconductors. The United States 
generally exports high-value fabricated chips and wafers to lower-cost 
locations for assembly and testing. It imports integrated circuits 
(semiconductor wafers that have been assembled and tested) for use in a 
variety of industries. However, global demand for finished 
semiconductors has increasingly shifted to Asia where final assembly of 
electronic consumer products takes place. 

The United States Is a Global Leader in Semiconductor Design and 
Fabrication: 

Semiconductor fabrication and design capabilities are spread among 
traditional producers such as the United States, Japan, the European 
Union, and newer producers such as South Korea, Taiwan, and China. 
According to industry experts and data, however, the United States 
remains one of the largest producers of semiconductors and, in 
particular, maintains cutting-edge development of both design and 
fabrication of new semiconductors. Industry estimates of semiconductor 
capacity vary, but the United States and Japan remain the largest two 
producers of semiconductors. Although a significant share of new high- 
end fabrication facilities are being built outside the United States 
for mass production, the United States is a key location for the 
fabrication facilities used for development of new semiconductor chips. 

As a global industry, U.S. production includes both U.S. companies and 
affiliates of foreign companies operating in the United States. Foreign 
companies have established operations in the United States to take 
advantage of U.S. technology, skilled labor, and the large domestic 
market, according to industry experts. One estimate suggests that about 
one-fifth of U.S.-based fabrication capacity was owned by foreign 
companies in 2001.[Footnote 16] In addition, foreign companies also 
take advantage of experienced design teams in the United States. 
Companies can potentially benefit from having operations in key areas 
around the globe where innovation is occurring. These operations are 
able to access the experienced labor pool and new innovations occurring 
in a particular region and transfer those developments to their global 
operations. Silicon Valley, California, for instance, is widely known 
as a key center of innovation in the semiconductor industry. 

Similarly, U.S. firms have invested in production capacity in Europe 
and Asia. However, according to industry experts, U.S. firms have 
generally not moved their R&D operations offshore. Data on patents and 
expenditures on R&D also indicate that U.S. semiconductor companies 
continue to locate their R&D work in the United States. Some industry 
analysts, though, are concerned that as production increasingly moves 
offshore to Taiwan and China, it will begin to draw more and more 
research activities with it. 

Industry experts also believe that most U.S. company design work is 
still conducted in the United States rather than offshore.[Footnote 17] 
According to these experts, U.S. companies are significant technology 
leaders in both the IDM and fabless design models. Although U.S. IDMs 
and fabless design companies operate globally, a larger share of their 
R&D and design work is conducted in the United States. Most of the 
fabless design firms are based in the United States, and many of the 
largest IDM's are also U.S.-based. Also, the development of foundries, 
particularly in Taiwan, likely allowed a wider range of fabless 
companies to develop in the United States than may have been possible 
without the existence of foundries. This is because the high cost of 
fabrication plants acts as an entry barrier to smaller firms. At the 
same time, there are a growing number of fabless design firms in 
Canada, Israel, and Taiwan, and U.S. companies are also operating 
design offices in these countries. Thus, the global share of design 
work by fabless companies is becoming less concentrated in the United 
States. 

U.S. Semiconductor Production Rebounding from 2001 Recession, but 
Employment Has Remained Flat: 

U.S. production statistics show that the value of semiconductor 
production in the United States grew steadily during the 1990s even 
while offshoring expanded. U.S. production of semiconductors and 
related devices (measured by value-added) peaked in 1999 at about $68 
billion, then declined steeply during the 2001 recession. It has since 
rebounded somewhat to $56 billion in 2004 (see fig. 3). 

Figure 3: Value-added Trend for U.S. Semiconductor and Related Device 
Manufacturing, 1987-2004: 

[See PDF for image] 

Source: U.S. Census Bureau; Annual Survey of Manufacturers. 

Note: This figure shows output of the industry measured by value-added. 
Value-added measures the dollar value of output in an industry minus 
the dollar value of intermediate products and raw materials purchased 
from other industries. For example, semiconductor value-added does not 
include the value of the raw silicon used in the production of the 
wafers. The values shown above are in current dollars (unadjusted for 
inflation). Price indices at this level of industry detail were not 
available. However, we did examine how the results would change using a 
higher level industry (computer and electronic products) price index to 
adjust for inflation (or deflation). Due to declining prices over time 
in the broader industry, the inflation-adjusted trend was accentuated, 
such that the rise was much steeper, the decline between 2000 and 2002 
was much shallower, and the industry has rebounded. Therefore, we found 
that our observation that the industry has grown rapidly and has 
rebounded since the recession is even stronger. 

[End of figure] 

U.S. employment in the semiconductor industry did not rebound after the 
2001 recession as production did. After a long decline from the mid- 
1980s through the early 1990s, U.S. semiconductor employment grew 
strongly through 2001 (see fig. 4). However, employment dropped sharply 
from a peak of about 292,000 in 2001 to around 226,000 employees in 
2003. After hitting a trough in 2003, employment in the semiconductor 
industry has been stagnant, although overall U.S. employment across all 
industries resumed growth in 2004. 

Figure 4: Employment Trend for Semiconductors and Related Devices 
Industry, 1972-2005: 

[See PDF for image] 

Source: Bureau of Labor Statistics. 

[End of figure] 

Employment in the semiconductor industry highlights the broader 
relationship between productivity growth and job declines in the U.S. 
manufacturing sector. Figure 5 shows an increase in productivity in the 
semiconductor and electronic components industry (a broader category 
than used in fig. 4) over the 15-year period from 1987. The pace of 
productivity growth sharply increased starting in late 1990s. Industry 
output continued to grow even after employment declined due to the 
increase in productivity (output per employee). 

Figure 5: Labor Productivity, Employment and Compensation Trends in 
Semiconductors and Electronic Components Manufacturing, 1988-2004: 

[See PDF for image] 

Source: Bureau of Labor Statistics. 

Note: Productivity, employment, and compensation are presented here as 
indexes that represent their values at each year relative to the base 
year (1997). 

[End of figure] 

The United States Is a Net Exporter of Semiconductors, Particularly 
High Value-Added Wafers and Chips: 

Since 2001, the United States has had a trade surplus in 
semiconductors, exporting more semiconductors and semiconductor 
components than it imported (see fig. 6). Both imports and exports grew 
rapidly from 1985 to 1995. From 1995 to 1998, exports continued to grow 
while imports remained flat. From 1998 to 2000, both imports and 
exports increased again rapidly, peaking in 2000 at about $48 billion 
(imports) and $45 billion (exports). From 2001 to 2005, imports 
declined sharply to about $26 billion, while exports also declined, but 
then leveled out in 2003 to about $34 billion. 

Figure 6: U.S. Imports and Exports of Semiconductors with All 
Countries, 1985-2005: 

[See PDF for image] 

Source: GAO analysis of U.S. Census Bureau trade statistics. 

Note: Trade values are presented in current dollars (unadjusted for 
inflation). Price indices for making inflation adjustments were not 
available for the entire time period. However, we did examine inflation-
adjusted constant dollar trade values for more recent years, and the 
findings in our analysis did not change. 

[End of figure] 

The majority of U.S. exports of semiconductors consist of chips and 
wafers, which are used to produce finished integrated circuits in other 
countries. The top five destinations for U.S. semiconductor exports 
were all Asian locations: Malaysia (13 percent), Korea (12 percent), 
Philippines (11 percent), Taiwan (9 percent), and China (8 percent). 
Exports of U.S. chips and wafers are the result of the fabrication 
process, which involves some of the most technologically advanced 
manufacturing processes. 

The majority of U.S. imports of semiconductors are finished integrated 
circuits (such as memory and logic integrated circuits), which are then 
used in other finished electronic goods, such as computers and cell 
phones. Finished integrated circuits are the result of chips and wafers 
being tested, cut, and packaged by separate manufacturing plants 
usually located abroad. This process, although still technologically 
sophisticated (and less labor-intensive than in the past), is still 
significantly less advanced than the fabrication process. In 2005, only 
13 percent of imports were chips and wafers whereas 71 percent of U.S. 
exports comprised chips and wafers. 

U.S. Exports to Asia Growing as Demand for Finished Semiconductors 
Expands in China: 

The decline in U.S. semiconductor imports since 2000 reflects the 
movement from the United States to Asia of manufacturing production of 
electronics products that use integrated circuits. Finished integrated 
circuits are moving to other countries in Asia, particularly China, for 
assembly into electronics products, rather than returning to the United 
States. Therefore, U.S. exports surpassed imports for the first time in 
2001. Chinese trade statistics demonstrate the other end of this 
movement with Chinese imports of integrated circuits soaring over the 
last 10 years, making China one of the largest markets for integrated 
circuits in the world. Much of this increase has been supplied by 
Taiwan, Korea, Malaysia, Japan, the Philippines, and the United States 
(see fig. 7). Although the United States is sixth in terms of direct 
exporters to China, some portion of U.S. exports of chips and wafers 
are passing through other Asian countries for assembly and testing 
(including China) before use in China's booming electronics industry. 
As mentioned above, the top destinations for U.S. wafer exports are 
Malaysia, Korea, Taiwan, the Philippines, and China. Those wafers are 
assembled and tested before being sent to electronics manufacturers for 
use in their products. These trade flows show the complex production 
chains that have developed across multiple countries. 

Figure 7: Chinese Imports of Semiconductors by Country, 1995-2005: 

[See PDF for image] 

Source: GAO analysis of Chinese trade statistics provided by Global 
Trade Information Services. 

Note: Trade statistics are presented in current U.S. dollars unadjusted 
for inflation since an appropriate price index for these imports is not 
available. 

[End of figure] 

The shift in production and trade flows toward Asia has two 
consequences. First, because final production increasingly takes place 
in Asia, the United States imports an increasing share of electronics 
and telecommunications products (that use semiconductors). Appendix III 
shows that this is reflected in the growing U.S. trade deficit with 
Asia and China, in particular, including in advanced technology 
products. Second, as electronics and telecommunications production 
chains increasingly locate in Asia, there are benefits to U.S. 
producers of semiconductors to locate abroad near their customers and 
take advantage of the production clusters developing there. Therefore, 
this trend creates an incentive for U.S. companies to offshore some 
activities. 

The United States Is the Largest Global Supplier, Employer, and Market 
for Software Services: 

Although the industry is globalizing, the United States has maintained 
its leadership in the development and expansion of the software 
services industry. U.S. companies are global leaders in the packaged 
software and custom software services segments of the industry. 
Although statistics on software services are more limited than for 
semiconductor manufacturing, indicators show that the United States is 
a leading developer and consumer of software globally. U.S. production 
and employment data show that the industry has generally rebounded 
after declining during the 2001 recession. Also, while both imports and 
exports have grown rapidly, the United States maintains a trade surplus 
in software services. 

The United States Is a Leading Software Developer and the Largest 
Supplier in the World: 

The U.S. software industry is the largest in the world and plays a 
leadership role in the global market for software services. U.S. 
companies are disproportionately ranked among the largest in the world, 
both in terms of revenues and numbers of top firms.[Footnote 18] U.S. 
companies also benefit from the large U.S. domestic market, which by 
one industry estimate accounts for about 50 percent of global demand 
for packaged software and about 40 percent of global demand for custom 
software services. U.S. software companies are also widely considered 
leaders in the development and delivery of leading-edge software 
services. According to industry experts, much of the development of 
these services takes place in the United States, although larger 
companies also employ teams of developers worldwide. 

U.S. Software Production Has Rebounded from the 2001 Recession: 

Although the industry experienced a downturn during the 2001 recession, 
it has since begun to recover. As figure 8 shows, the U.S. software 
industry grew rapidly through the late 1990s, declined during the 2001 
recession and, as of 2004, had rebounded to its peak in 2000 based on 
industry revenue. Packaged software appears to be leading the rebound, 
while custom software revenues have remained flat since 2002. 

Figure 8: U.S. Software Industry Revenues, 1990-2004: 

[See PDF for image] 

Source: U.S. Census Bureau, Services Annual Survey. 

Note: Census industry classification changed from the Standard 
Industrial Classification (SIC) system in 1997 to the North American 
Industry Classification System (NAICS) in 1998. Therefore, there is a 
break in the series as indicated by the shaded area and dotted trend 
lines. Also, data on value-added for software services industries are 
not collected by the Bureau of the Census. Total revenue includes 
exports and is reported in current U.S. dollars (not adjusted for 
inflation). Price indices at this level of industry detail were not 
available. However, we did examine how the results would change using a 
higher level industry price index to adjust for inflation (or 
deflation). The higher level industries (publishing, which includes 
packaged software, and information and data processing services, which 
include custom software) experienced some inflation over this period 
and, therefore, after adjusting for inflation the growth in the 
software industry was somewhat reduced. However, our observations on 
the both the growth of the industry and its rebound since the recession 
were still consistent with the inflation-adjusted data. 

[End of figure] 

U.S. Employment in Computer Specialist Occupations Has Grown Overall 
Since the 2001 Recession: 

U.S. software industry employment is the largest in the world. 
According to one industry estimate, U.S. software employment makes up 
roughly about half of the global workforce in packaged software and 
about a third of the workforce employed in IT services industry, which 
includes custom software services.[Footnote 19] As a group, software 
occupations, or computer specialists as designated by the Department of 
Labor's Bureau of Labor Statistics (BLS), experienced relatively large 
gains in both employment and hourly wages from 2001 to May 2005 (the 
most recent time period for which comparable occupation-based data are 
available).[Footnote 20] This period largely coincided with an economic 
recovery following the 2001 recession.[Footnote 21] Table 2 compares 
changes in employment and hourly wages for nine computer specialist 
occupations and that of all U.S. occupations. Seven of the occupations 
saw employment growth ranging from 1.1 percent to 46.9 percent compared 
to 1.8 percent for all U.S. occupations. Employment for two occupations 
(computer programmers and database administrators[Footnote 22]) 
declined by 22.4 percent and 4.7 percent, respectively, from 2001 to 
May 2005. The wages for these occupations also increased more slowly 
than the wages for all U.S. occupations. Hourly wages for five 
occupations increased more slowly than the wages for all U.S. 
occupations, increasing by 3.5 percent to 10.5 percent compared with 
11.4 percent for all U.S. occupations. Wages for four occupations, 
however, increased faster than the wages for all U.S. occupations, 
rising by 12 percent to 22.2 percent. 

Table 2: Changes in Hourly Wage and Employment for U.S. Computer 
Specialist Occupations: 

Occupations: Computer and information scientists, research; 
Hourly wage (May 2005): $45.21; 
Percentage change in hourly wage: (2001-May 2005): 22.2%; 
Number of jobs (May 2005): 25,890; 
Percentage change in employment: (2001-May 2005): 1.1 %. 

Occupations: Computer software engineers, systems software; 
Hourly wage (May 2005): 40.54; 
Percentage change in hourly wage: (2001-May 2005): 13.2; 
Number of jobs (May 2005): 320,720; 
Percentage change in employment: (2001-May 2005): 22.6. 

Occupations: Computer software engineers, applications; 
Hourly wage (May 2005): 38.24; 
Percentage change in hourly wage: (2001-May 2005): 9.9; 
Number of jobs (May 2005): 455,980; 
Percentage change in employment: (2001-May 2005): 26.1. 

Occupations: Computer systems analysts; 
Hourly wage (May 2005): 33.86; 
Percentage change in hourly wage: (2001-May 2005): 10.5; 
Number of jobs (May 2005): 492,120; 
Percentage change in employment: (2001-May 2005): 9.8. 

Occupations: Computer programmers; 
Hourly wage (May 2005): 32.40; Percentage change in hourly wage: (2001-
May 2005): 7.2; 
Number of jobs (May 2005): 389,090; 
Percentage change in employment: (2001-May 2005): 
-22.4. 

Occupations: Database administrators; 
Hourly wage (May 2005): 31.54; 
Percentage change in hourly wage: (2001-May 2005): 12.3; 
Number of jobs (May 2005): 99,380; 
Percentage change in employment: (2001-May 2005): - 4.7. 

Occupations: Network systems and data communications analysts; 
Hourly wage (May 2005): 31.23; 
Percentage change in hourly wage: (2001-May 2005): 7.7; 
Number of jobs (May 2005): 185,190; 
Percentage change in employment: (2001-May 2005): 46.9. 

Occupations: Network and computer systems administrators; 
Hourly wage (May 2005): 30.39; 
Percentage change in hourly wage: (2001-May 2005): 12.0; 
Number of jobs (May 2005): 270,330; 
Percentage change in employment: (2001-May 2005): 18.6. 

Occupations: Computer support specialists; 
Hourly wage (May 2005): 20.86; 
Percentage change in hourly wage: (2001-May 2005): 3.5; 
Number of jobs (May 2005): 499,860; 
Percentage change in employment: (2001-May 2005): 1.3. 

Occupations: All U.S. occupations; 
Hourly wage (May 2005): $18.21; 
Percentage change in hourly wage: (2001-May 2005): 11.4%; 
Number of jobs (May 2005): 130,307,850; 
Percentage change in employment: (2001- May 2005): 1.8%. 

Source: Occupational Employment Statistics Survey, BLS. 

Note: Occupations are ranked by hourly wage. 

[End of table] 

Computer software engineers (including systems software and 
applications engineers, two high-wage occupations) saw modest increases 
in wages but relatively large increases in employment, growing by 22.6 
and 26.1 percent, respectively. Computer software engineers design, 
develop, and test the software and computer systems, applying computer 
science, mathematics, and engineering expertise. The integration of 
Internet technologies and the rapid growth in e-commerce have led to a 
rising demand for computer software engineers. Although hourly wages of 
network systems and data communications analysts increased by a 
relatively low 7.7 percent, their job growth was the largest of all 
computer specialist occupations at 46.9 percent. This group of computer 
specialists designs, tests, and evaluates network systems and other 
data communications systems. 

According to BLS, employment in computer specialist occupations, apart 
from computer programmers, is projected to grow much faster than 
overall U.S. employment.[Footnote 23] Although total U.S. employment is 
projected to grow 13 percent over the 2004 to 2014 period, employment 
of computer specialists is projected to grow 31.4 percent (see fig. 9). 
BLS projects that the demand for computer-related jobs is likely to 
increase as employers continue to adopt and integrate increasingly 
sophisticated and complex technologies. Growth, however, will not be as 
fast as the previous decade, as the software industry matures, and as 
routine work is increasingly offshored. 

Figure 9: Projected Rate of Job Growth for Computer Specialist 
Occupations, 2004-2014: 

[See PDF for image] 

Source: BEA. 

[End of figure] 

Projected job growth for computer software engineers and network 
systems and data communications analysts is especially robust. The 
BLS's Occupational Outlook Handbook suggests that demand for workers 
with specialized technological skills is expected to increase sharply 
as employers use and improve the efficiency of new technologies. As the 
race for increasingly sophisticated technological innovations 
continues, the need for more highly skilled workers to implement these 
innovations will continue. More highly skilled computer specialists 
will be needed as businesses and other organizations try to manage, 
upgrade, and customize their increasingly complicated computer systems. 
Computer specialists who have a combination of strong technical and 
good interpersonal and business skills will be in demand. 

Unlike other computer specialists, job growth of computer programmers 
is expected to lag significantly behind the growth in overall U.S. 
occupations. Programmers are projected to grow only by 2 percent from 
2004 to 2014. Because computer programming requires little localized or 
specialized knowledge, computer programming can be performed anywhere 
in the world and transmitted electronically. Consequently, programmers 
potentially face a higher risk of having their jobs offshored than 
other computer specialists such as software engineers, who are involved 
in more complex information technology functions. Another factor 
limiting job growth in computer programming is progress in programming 
technology. Computer software has become increasingly sophisticated, 
enabling users to write basic code without programmers' involvement for 
routine programming. 

The United States Maintains a Trade Surplus in Software Services Trade, 
but Imports Are Growing: 

The United States is a net exporter of software services and has 
maintained this trade surplus for several decades. Although U.S. 
exports are rising rapidly, imports are also increasing in this 
category. Canada is the largest supplier of imported computer and data 
processing services to the U.S. market but, as we have previously 
reported, India is rapidly growing as a supplier of these 
services.[Footnote 24] Figure 10 shows U.S. exports and imports of 
computer and data processing services, the category that includes both 
custom and packaged software services (as defined by BEA) since 1986. 

Figure 10: U.S. Unaffiliated Exports and Imports in Computer and Data 
Processing Services, 1986-2004: 

[See PDF for image] 

Source: BEA. 

Note: The values are for unaffiliated transactions--sales between 
companies located in the United States and unrelated third party 
providers or purchasers located abroad. Statistics on both affiliated 
and unaffiliated transactions in this product category are only 
available since 2001. However, these data show that United States also 
maintains a trade surplus in overall (affiliated and unaffiliated) 
computer and data processing services from 2001-2004. 

[End of figure] 

U.S. exports of software services make up about 13 percent of overall 
U.S. software revenues according to the U.S. Census Bureau (Census). 
However, most export revenue is derived from packaged software exports. 
These Census statistics show a much larger value of exports than the 
BEA trade in services statistics.[Footnote 25] As shown in figure 11, 
U.S. companies report nearly $22 billion in exports of software 
services, primarily comprising about $20 billion in U.S. package 
software exports. 

Figure 11: U.S. Exports of Software, 1998-2004: 

[See PDF for image] 

Source: Census. 

[End of figure] 

Information on trade in software services is significantly more limited 
than information on trade in semiconductors. Although both BEA and 
Census collect statistics on software trade, as demonstrated by the 
previous two figures, the data are available only for the aggregate 
categories shown. In comparison, for semiconductors, over 230 
individual semiconductor goods are identified by Census as they cross 
international borders. In addition, most countries in the world utilize 
the same goods classification system, known as the Harmonized System, 
to record trade in goods. However, efforts to create and utilize 
detailed and compatible classification systems across countries for 
services such as software are still relatively new.[Footnote 26] Part 
of the challenge in collecting detailed statistics on services 
industries, such as software, derives from the "intangible" nature of 
many services--they are not necessarily physical products--and the fact 
that they don't cross customs borders like goods. Rather, services data 
is collected by surveying companies for information on their payments 
or receipts for services. In addition, services can be delivered to the 
customer through many different channels, including licensing 
agreements, imbedded in goods such as computers, or a commercial 
presence such as a foreign subsidiary. 

The U.S. Semiconductor and Software Industries Benefit from the Large, 
Innovative U.S. Economy: 

The United States maintains substantial advantages as a large, 
technologically sophisticated economy. The U.S. high-technology 
industries, such as semiconductors and software, have benefited from a 
U.S. economic environment that supports innovation--world-class 
universities and research centers, a talented labor pool, and high 
levels of spending on R&D. The industries also benefited from a 
competitive U.S. business environment, an efficient legal system for 
contracts and intellectual property protection, and a large domestic 
market.[Footnote 27] 

University and Research Centers, Talented Labor, and R&D Investment 
Have Helped Foster Innovation: 

Although a wide range of causes and circumstances leads to new 
innovations, certain enabling factors create an environment that 
fosters new ideas and their development. These include (but are not 
limited to) such factors as the higher education system and related 
research centers, pools of talent available, and the investments in 
research and development.[Footnote 28] 

The U.S.'s world-class higher education system and research institutes 
create communities for researchers and educators and are widely 
considered a key competitive advantage. The higher education system in 
the United States includes many universities that are ranked among the 
best in the world in terms of research, education, and 
entrepreneurship. Also, a large number of top applicants from around 
the world apply for undergraduate, graduate, and postdoctoral study. 
More specifically, U.S. computer science and engineering programs--of 
particular importance to high-technology industries such as 
semiconductors and software--are leaders in their fields. The higher 
education system has provided both a strong research environment and a 
pool of talented labor--both native born and foreign students who 
remained after education. 

A second factor that fosters innovation is the quality and number of 
available researchers and other skilled labor. Countries with larger 
and more talented labor pools are more likely to foster and sustain 
innovation. The United States has a world-class talent pool that 
includes both technical and managerial talent. The United States has 
the largest number of researchers worldwide, with about 1.3 million, 
followed closely by the European Union (EU-25), according to data from 
the Organization for Economic Cooperation and Development. China, 
ranked third, has rapidly increased the number of its researchers to 
surpass Japan. Although the quality of these researchers is not 
captured by the indicator, it does show the growing size of the Chinese 
research community. 

A third factor that fosters innovation is a country's investment in 
research and development. This investment may come from several 
sources, including the government, academia, and business. U.S. 
expenditures on R&D are the largest in the world and have continued to 
grow over time (see fig. 12). Currently, the United States spends about 
2.7 percent of its gross domestic product on R&D expenditures, compared 
with about 3.2 percent for Japan and 1.4 percent for China. For certain 
industries such as semiconductors, early investments by the federal 
government--the military, in particular--have been key in the initial 
development of the industry. However, this role may change over time. 
For the United States, the increase in R&D expenditures over the past 
decade has been driven by the business community, while the total 
amount of federal R&D has grown much more slowly in comparison. 

Figure 12: Gross Domestic Expenditures on Research and Development by 
Country, 1990-2004: 

[See PDF for image] 

Source: Organization for Economic Cooperation and Development; Main 
Science and Technology Indicators, 2005. 

Note: 2000 PPP$ refers to gross expenditure data converted from 
national currencies (e.g., the Yen) into inflation-adjusted year 2000 
U.S. dollars based on purchasing power parity (PPP) conversion factors. 
PPP conversion factors take into account differences in the relative 
prices of goods and services and differ from market exchange rates. 
Data on EU-25 R&D expenditures prior to 1995 are not available. 

[End of figure] 

While the United States has generally maintained a strong advantage in 
areas that foster innovation, several studies have recently raised 
questions about continued dominance of the United States in cutting- 
edge innovation.[Footnote 29] They cite a range factors that indicate 
the rise of other competitors in traditionally U.S.-dominated areas. 
For instance, changes in U.S. visa and immigration requirements have 
been cited as hampering the number of foreign students, researchers, 
and high-tech workers who are attracted to the United States and 
allowed to reside here.[Footnote 30] At the same time, other countries' 
university systems are increasingly competing with the United States to 
attract the most qualified students and researchers. According to these 
studies, these changes have led to a decline in the number of 
university applications from foreign students. Similarly, other 
countries have liberalized their economies and provided greater 
opportunities for higher skilled workers. Therefore, more students and 
researchers, including those from India and China, who may have once 
stayed in the United States have an incentive to return to their native 
countries. 

Business Environment, Legal System, and Domestic Market Affect 
Commercialization of Innovation: 

In addition to an environment for fostering innovation, countries need 
to be able to commercialize these innovations to affect the wider 
economy. Several factors contribute to a U.S. competitive environment 
that encourages innovation to be commercialized. First, the business 
environment includes relatively competitive product markets that 
encourage businesses to take new products to market in order to gain 
advantage over rivals, while also allowing new entrants to challenge 
existing companies. The United States also has a relatively efficient 
financial system, including venture capital markets that fund new 
innovations and start-ups in high-technology industries. The U.S. legal 
and regulatory environment, including its intellectual property 
protections (such as patents), allows individuals and companies to be 
rewarded for their investment in innovation. Finally, the large U.S. 
domestic market provides an avenue for companies to sell new products 
to a wide range of sophisticated customers. The U.S. economy is by far 
the largest in the world, and per capita income is also one of the 
highest in the world. This creates an environment for U.S. companies to 
develop and sell new products profitably. In addition, companies that 
are close to their customers are able to spot new trends and 
preferences in demand and cater to them. This is particularly true in 
high-technology industries in which the product life cycle is 
relatively short and profit margin for older products declines quickly. 

Concluding Observations: 

The past decade's revolution in telecommunications and related advances 
in supply chain management capabilities have deeply affected the 
business models for both the semiconductor manufacturing and software 
services industries. These industries' overall business model is now a 
global one, in which U.S. firms regularly consider a wide range of 
locations for their operations and source different parts of their 
operations wherever the advantages are most compelling. For the 
semiconductor industry, firms initially offshored labor-intensive 
assembly activities to cut labor costs, but more recently firms have 
offshored other activities for various reasons, including proximity to 
other industry suppliers, closer relations with foreign customers, 
benefits offered by foreign governments, and the availability of both 
skilled and unskilled human capital. In the software industry, the 
offshoring trend is more recent, but the motivations are similar. 

For software services, however, an important difference may be the 
possible speed and scale of employment shifts. Software services 
offshoring, compared with semiconductor manufacturing offshoring, does 
not need the same physical infrastructure, such as ports, roads, and 
factories, and thus can be set up more quickly. It is more labor 
intensive than capital intensive, and thus may be more sensitive to 
wage differentials. In addition, service occupations related to 
software programming are large in comparison to manufacturing jobs in 
the semiconductor industry. In semiconductor manufacturing, there was 
relatively slow movement up the value chain as firms invested in the 
overseas workforce and factory facilities. India's software industry 
development has advanced more quickly, with rapid technological changes 
bringing large numbers of highly educated, but underused, English- 
speaking workers to the doorstep of firms willing to operate from 
India. The data available to monitor the scale of services offshoring, 
unfortunately, are much more limited than those available for following 
trade in manufactured products. Semiconductor products, for example, 
can be identified and inspected at U.S. borders, whereas software 
imports and exports can be transmitted almost instantaneously over the 
Internet. 

Government policies also played important, but different, roles in 
Taiwan, China, and India; however, all three governments have placed 
high importance on education. In recent years, China has been 
transforming large parts of its coastal cities through massive 
infrastructure investments and has provided more targeted inducements 
for firms, such as support for science and technology parks and various 
types of financial assistance. India liberalized parts of its central 
government apparatus in the early 1990s, but its investment in physical 
infrastructure such as roads and ports has been much more limited, 
although India has also supported its science parks and put in place 
advanced telecommunications infrastructure improvements. These 
incentives for software exporters appear to have been well targeted. 

The comparison of these two offshoring experiences offers some insights 
for U.S. policies. Clearly, a large and well-educated population 
appears to be a central element to success in both semiconductor 
manufacturing and software services activities. Also, technological 
changes have impacts that are not always predictable and, in a now 
closely-connected global business world, such changes can have 
continuing dynamic effects on U.S. industries. India may have neither 
fully predicted or planned its current strengths in software services, 
nor foreseen how its pool of native English speakers could be such an 
asset, but it now realizes the importance of enhancing its strengths in 
these areas. In addition, ambitious national goals--whether China's 
semiconductor development road maps or Indian businesses' long-term 
strategies--are additional elements in the mix of factors that will 
shape these countries' futures and will pose competitive challenges to 
U.S. firms. 

As numerous recent studies have reported, the ability of the United 
States to continue to compete at the most advanced levels in high 
technology industries depends on a range of reinforcing factors: high- 
level R&D investment by companies and government, innovative academic 
environments attracting and training the highest-skilled researchers, a 
competitive business environment that fosters development and 
commercial application of new technologies, and a flexible and skilled 
workforce. These factors are being nourished in China, Taiwan, and 
India, as these countries seek to move further up the value chain and 
to "leapfrog" advanced country capabilities where possible. Indeed, 
these countries have modeled their industry development strategies on 
various aspects of the U.S.'s successful model. The United States is an 
integral part of this dynamic world economy--in which it will be 
important for U.S. businesses and policymakers to keep alert to 
technological changes, to anticipate competitor countries' strategies, 
and to preserve and enhance the elements of the innovation environment 
that helped make the United States a model. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Departments of State and 
Commerce for their review and comment. The Department of State did not 
provide comments. We received written comments from the Department of 
Commerce, which agreed our findings. (See app. IV.) The Department of 
Commerce also provided technical comments, which we incorporated into 
the report, as appropriate. 

We are sending copies of this report to interested congressional 
committees and the Departments of State and Commerce. We also will make 
copies available to others on request. In addition, the report will be 
available at no charge on the GAO Web site at [Hyperlink, 
http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-4128 or yagerl@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Key contributors to this report are 
listed in appendix V. 

Signed by: 

Loren Yager: 
Director, International Affairs and Trade: 

List of Committees: 

The Honorable Max Baucus: 
Ranking Minority Member: 
Committee on Finance: 
United States Senate: 

The Honorable Henry A. Waxman: 
Ranking Minority Member: 
Committee on Government Reform: 
House of Representatives: 

The Honorable Charles Rangel: 
Ranking Minority Member: 
Committee on Ways and Means: 
House of Representatives: 

The Honorable Bart Gordon: 
Ranking Minority Member: 
Committee on Science: 
House of Representatives: 

[End of section] 

Appendix I: Scope and Methodology: 

This report discusses (1) the development of offshoring in 
semiconductor manufacturing and software services over time, (2) the 
factors enabling the expansion of offshoring in these industries, and 
(3) the development of these industries in the United States as they 
have become more global. 

To obtain information about the key developments in the offshoring of 
semiconductor manufacturing and software services, we reviewed 
available literature; attended conferences on the subject; and 
interviewed government officials, representatives of private firms, 
industry associations, and research organizations in China, India, 
Taiwan, and the United States. We performed a literature search and 
obtained information from several research organizations, universities, 
and industry associations that have published industrywide studies on 
offshoring and the key developments in both the semiconductor 
manufacturing and software services industries, including the 
Association for Computing Machinery; Brookings Institution; Gartner, 
Inc; McKinsey and Company; the University of California, Berkeley; 
Stanford University; Carnegie Mellon University; the Semiconductor 
Industry Association; and the Information Technology Association of 
America. We attended conferences on developments in the semiconductor 
and software services industries and the general offshoring phenomenon. 
We interviewed researchers at private research organizations, industry 
experts at the U.S. Department of Commerce and the U.S. International 
Trade Commission, and government officials from India and Taiwan. In 
addition, we met representatives of private sector firms in the 
semiconductor and software services industries in China, India, Taiwan, 
and the United States. We also interviewed representatives and obtained 
data from organizations representing semiconductor and software 
services firms and workers, including the Semiconductor Industry 
Association, the National Association of Software and Service 
Companies, and the Information Technology Association of America. We 
discussed with these sources the historical changes that have occurred 
broadly in the computer hardware industry, particularly with respect to 
China and Taiwan, and the software services industry, particularly with 
regard to India. 

To determine the factors that have contributed to offshoring in 
semiconductor manufacturing and software services, we conducted a 
review of available literature and interviewed representatives of 
private sector firms, semiconductor and software services industry 
associations, business associations, and research organizations (see 
above). In addition, we interviewed industry experts within the U.S. 
government and the governments of India and Taiwan. We met with and 
reviewed relevant literature from researchers who have published on the 
offshoring phenomenon and the factors contributing to global 
developments in semiconductor manufacturing and software services; 
including experts from the Brookings Institution; the Institute for 
International Economics; the Milken Institute; and the University of 
California, Berkeley. We interviewed representatives of private sector 
firms in China, India, Taiwan, and the United States that have globally 
sourced semiconductor manufacturing and software services; trade and 
industry experts in the U.S. Department of Commerce; and the 
governments of India and Taiwan. In addition, we interviewed 
representatives of business and industry associations, such as the 
Federation of Indian Chambers of Commerce and Industry, the U.S.-Taiwan 
Business Council, and the Semiconductor Industry Association. 

To determine developments in the semiconductor and software services 
industries in the United States as they have become more global, we 
examined available government data, information from experts in both 
the semiconductor and software services industries, and other private 
sector research. We obtained U.S. international trade data from the 
Bureau of Economic Analysis (BEA) and the U.S Census Bureau. We also 
obtained foreign countries' international trade data through the United 
Nations and a private company, Global Trade Information Services. We 
obtained foreign direct investment data from BEA and domestic 
production data from Census. To assess the limitations and the 
reliability of various data series, we reviewed technical notes and 
related documentation and met with officials from BEA and Census, as 
well as individuals in the private sector familiar with these data. In 
addition, we reviewed relevant research studies and obtained data from 
several private sector entities. Although we do not report these data 
directly, we used them to corroborate information from other sources. 
To determine employment trends in the semiconductor and software 
services industries, we analyzed available U.S. government employment 
data from the Bureau of Labor Statistics (BLS). We cross-checked 
various employment data and reviewed technical notes in BLS 
publications to assess the limitations and reliability of these data. 
We also discussed the limitations and reliability of BLS data with BLS 
officials. We determined that the data we used in this report to show 
the development and trends in the semiconductor and software industries 
were sufficiently reliable for these purposes. 

We conducted our review from October 2005 through August 2006 in 
accordance with generally accepted government auditing standards. 

[End of section] 

Appendix II: U.S. Multinational Companies' Investment and Operations in 
the Semiconductor and Software Industries: 

U.S. multinational companies' worldwide investments and operations 
(including production, employment, and research and development (R&D) 
have played an important role in the globalization of the semiconductor 
and software industries.[Footnote 31] U.S. statistics show that overall 
multinational corporation (MNC) investments have still tended to be in 
developed economies, rather than in developing economies such as India 
and China. However, certain manufacturing sectors such as the computer 
and electronic products industry (including semiconductors) have a 
relatively higher share of investment, production, and employment in 
developing countries. In particular, U.S. companies' investments and 
production in this industry are relatively higher in the Asia-Pacific 
region (particularly Singapore) than other industries. Employment is 
even more concentrated abroad--likely due to the movement of more labor-
intensive production operations overseas in order to reduce costs. 
Conversely, research and development expenditures are much more 
concentrated in the United States than they are in foreign affiliates. 

In recent years, U.S. Investment Offshore Has Been Relatively Stable 
and Has Been Larger in Singapore and Malaysia, Than in Taiwan and 
China: 

U.S. direct investment abroad statistics show that overall U.S. 
investment (across all industries) in developing country markets is 
still a relatively small share of total U.S. direct investment abroad 
(less than 1 percent of the total each for India, China, and other 
developing countries, except Mexico and Brazil), according to 
statistics from the Bureau of Economic Analysis (BEA).[Footnote 32] 
However, within the computer and electronic products industry (which 
includes semiconductors),[Footnote 33] Singapore was the most 
significant Asia-Pacific country accounting for 15 percent of U.S. 
global investment in that industry as of 2004.[Footnote 34] Malaysia 
and Japan were next with about 5 percent; followed by Korea (4 
percent); Taiwan (3 percent); and China, Hong Kong, and the Philippines 
(2 percent, each). Figure 13 shows the value of U.S. foreign direct 
investment (FDI) from 1999 to 2004 in this industry for selected Asian 
countries. As figure 13 shows, Singapore accounted for $8.8 billion in 
U.S. FDI in 2004 (down from $13.5 billion in 2001), or about 15 percent 
of the global total in this industry. Interestingly, the value of U.S. 
FDI in China in this sector has fallen since 2001--more significantly 
than for other countries, except Singapore. These data represent the 
accumulated investments (stock) made by U.S companies in the computer 
and electronic products industry. As discussed in this report, U.S. 
companies moved labor-intensive assembly and testing operations 
overseas over the past several decades. Also, U.S. exports of 
semiconductor wafers were largest to Malaysia, Korea, Taiwan, 
Philippines, and China. This reflects the production process in which 
fabricated wafers are then sent overseas for final assembly and test by 
U.S. companies' affiliates (as well as unaffiliated contractors). 

Figure 13: U.S. Direct Investment Abroad in the Computers and 
Electronic Products Industry, Selected Asian Countries, 1999-2004: 

[See PDF for image] 

Source: BEA. 

Note: U.S. direct investment abroad is the stock of U.S. investments in 
a particular country valued in a historical cost basis. The computer 
and electronic products industry includes semiconductor production. 
However, detailed investment statistics by country for the 
semiconductor industry are not available. 

[End of figure] 

Within the semiconductor industry, the majority of U.S. companies' 
global production (as measured by value-added) remained in the United 
States, although the share declined during the recent recession. As 
figure 14 shows, semiconductor value-added by U.S. parents (U.S. 
operations) took a steep decline in 2001, remained flat in 2002, and 
rebounded somewhat in 2003. Value-added by U.S. companies' affiliates 
abroad accounted for about 28 percent of U.S. MNC's global production, 
while the Asia-Pacific region (excluding Japan and Australia), in 
particular, accounted for about 9 percent of global production. 

Figure 14: Value-added in Semiconductors--U.S. Parents and MOFAs 
(including Asia-Pacific, excluding Japan and Australia): 

[See PDF for image] 

Source: BEA. 

Note: MOFA refers to majority-owned foreign affiliates. Data for 2003 
are preliminary. 

[End of figure] 

Global Semiconductor Employment by U.S. Companies Is Roughly Split 
between Their U.S. Operations and Offshore Locations: 

U.S. MNCs that operate affiliates offshore have overall split their 
employment between their U.S. operations and their foreign affiliates. 
According to data from BEA, about 53 percent of MNC's global 
semiconductor employment was located in offshore affiliates in 2003, up 
from 49 percent in 1999.[Footnote 35] As previously discussed, this 
reflects the trend begun in 1960s of U.S. companies' offshoring much of 
their labor-intensive assembly and testing operations to lower wage 
countries, particularly in Asia. BEA statistics also show that a 
relatively higher share of U.S. employment in semiconductor 
manufacturing is concentrated in Asia compared with other industries. 
Similarly, U.S. MNCs in computer and electronic product manufacturing 
industries (of which semiconductors is a part), in general had 
relatively higher shares of their global employment located abroad 
(about 38 percent) than other information and communications technology 
industries such as computer system design and related services (35 
percent), as well as across all industries (28 percent) in 2003. 

Employment statistics from the Semiconductor Industry Association (SIA) 
show a similar pattern for U.S.-based companies.[Footnote 36] According 
to SIA, about 54 percent of U.S. companies' semiconductor employment 
was located in North America (mainly the United States) in 2004. This 
is down from a peak of about 60 percent in 1998 but still higher than 
in the 1980s and 1990s, which was between 45 and 50 percent. In 
addition, about 28 percent of U.S. companies' North American workforce 
was engaged in R&D in 2004. According to industry experts, a much 
higher share of U.S. companies' R&D employment is based in the United 
States, rather than offshore. 

U.S. Companies Investments in Overseas Affiliates to Supply Software 
Services Still Relatively Low: 

As discussed above, U.S. direct investment abroad statistics show that 
overall investment (across all industries) in developing country 
markets is still a relatively small share of total U.S. direct 
investment abroad. This is also generally true in services industries 
that include software services.[Footnote 37] For example, U.S. direct 
investment in India in the information sector and the professional, 
scientific, and technical services sector are both less than 1 percent 
of global investment in those sectors. However, investment in Ireland 
in the information sector accounted for 30 percent of global U.S. 
direct investment abroad in that sector in 2004. Over time, Ireland has 
attracted investment by a large number of U.S. companies to produce 
software for the European Union market. 

Similarly, U.S. multinational companies' operations abroad (including 
employment) in software services are relatively small compared with the 
semiconductor industry and the broader electronics hardware industry. 
For example, table 3 shows that, for semiconductors, over half of U.S. 
MNC's employment was located in their foreign affiliates (rather than 
their domestically based parent company). In contrast, services 
industries such as publishing (which includes packaged software) and 
computer systems design and related services (which includes custom 
software) had between one-fifth and one-third of their employment 
located in their foreign affiliates. 

Table 3: Share of U.S. Foreign Affiliates' Employment in Total U.S. MNC 
Employment Worldwide--ICT Sector Industries, 1999-2003: 

Industry: ICT-producing industries; 
1999: 55%; 
2000: 53%; 
2001: 51%; 
2002: 49%; 
2003: 49%. 

Industry: Computers and electronic products;
1999: 43; 
2000: 40; 
2001: 40; 
2002: 39; 
2003: 38. 

Industry: Semiconductors and other electronic components; 
1999: 49; 
2000: 52; 
2001: 53; 
2002: 53; 
2003: 53. 

Industry: Publishing industries (including packaged software); 
1999: 14; 
2000: 16; 
2001: 17; 
2002: 18; 
2003: 18. 

Industry: Information services and data processing services; 
1999: 29; 
2000: 29; 
2001: 28; 
2002: 28; 
2003: 27. 

Industry: Computer systems design and related services (including 
custom software; 
1999: 29; 
2000: 31; 
2001: 32; 
2002: 32; 
2003: 35. 

Industry: All industries (total); 
1999: 25%; 
2000: 25%; 
2001: 26%; 
2002: 27%; 
2003: 28%. 

Source: BEA. 

Note: Shares are calculated by dividing U.S. foreign affiliates' 
employment by total U.S. MNC employment, which is the sum of U.S. 
foreign affiliates and U.S. parent company employment. Data for 2003 
are preliminary. ICT-producing industries include computer and 
electronic products manufacturing, publishing industries (includes 
software), information and data processing services, and computer 
systems design and related services. 

[End of table] 

MNC's Research and Development Relatively Concentrated in U.S. 
Operations: 

Compared with production or employment, U.S. MNC R&D expenditures are 
more concentrated in the United States. As shown in table 4, in 2003 
about 14 percent of U.S. MNC R&D expenditures were made through U.S. 
majority-owned foreign affiliates (MOFAs) out of total MNC R&D 
expenditures (U.S. parents plus MOFAs). The share was similar for the 
computer and electronic products industry (about 13 percent) and 
publishing industries (about 10 percent) but less for semiconductors (8 
percent), computer systems design and related services (about 5 
percent), and information services and data processing services (1 
percent). In comparison, MOFAs accounted for about 26 percent of value- 
added for all industries, 24 percent for computer and electronic 
products, and 28 percent for semiconductors. Likewise, MOFAs accounted 
for 28 percent of employment across all industries, 38 percent for 
computer and electronic products, and 53 percent of semiconductor 
employment. 

Table 4: U.S. Companies' Foreign Affiliates' Share of Total R&D 
Expenditures: 

Industry: Computers and electronic products; 
1999: 11%; 
2000: 13%; 
2001: 13%; 
2002: 13%; 
2003: 13%. 

Industry: Semiconductors and other electronic components; 
1999: 7; 
2000: 8; 
2001: 7; 
2002: 9; 
2003: 8. 

Industry: Publishing industries; 
1999: N/A; 
2000: 6; 
2001: 6; 
2002: 8; 
2003: 10. 

Industry: Information services and data processing
1999: N/A; 
2000: 1; 
2001: 1;
2002: 1; 
2003: 1. 

Industry: Computer systems design and related services; 
1999: 4; 
2000: 4; 
2001: 4; 
2002: 5; 
2003: 5. 

Industry: All industries (total); 
1999: 13%; 
2000: 13%; 
2001: 12%; 
2002: 13%; 
2003: 14%. 

Source: BEA. 

Note: Data for 2003 are preliminary. "N/A" indicates that the data have 
been suppressed by BEA to avoid disclosure of data of individual 
companies. 

[End of table] 

Across industries, MNCs spent about 22 percent of MOFA R&D expenditures 
in the computer and electronic products industry (5 percent in 
semiconductors alone), making it the third largest industry overall in 
2003. Other information and computer technology (ICT) sectors 
represented very small shares (see table 5). Across major industries, 
transportation equipment manufacturing accounted for 29 percent of 
total MOFA R&D expenditures (26 percent of that was autos). The next 
largest was chemicals with 25 percent of R&D expenditures (of which 21 
percent was pharmaceuticals). 

Table 5: Share of Selected Industries in Total MOFA R&D Expenditures: 

Industry: Computers and electronic products; 
1999: 21%; 
2000: 27%; 
2001: 29%; 
2002: 24%; 
2003: 22%. 

Industry: Semiconductors and other electronic components; 
1999: 4; 
2000: 4; 
2001: 4; 
2002: 5; 
2003: 5. 

Industry: Publishing industries; 
1999: N/A; 
2000: 2; 
2001: 2; 
2002: 3; 
2003: 3. 

Industry: Information services and data processing services; 
1999: N/A; 
2000: 0; 
2001: 0; 
2002: 0; 
2003: 0. 

Industry: Computer systems design and related services; 
1999: 2; 
2000: 2; 
2001: 2; 
2002: 2; 
2003: 2. 

Industry: All industries (total);
1999: 100%; 
2000: 100%; 
2001: 100%; 
2002: 100%; 
2003: 100%. 

Source: BEA. 

Note: These shares represent the percent of total R&D expenditures 
abroad for each of the selected industries. Data for 2003 are 
preliminary. "N/A" indicates that the data have been suppressed by BEA 
to avoid disclosure of data of individual companies. 

[End of table] 

Asia-Pacific economies account for a relatively small share of U.S. 
MNC's R&D expenditures. Except for Japan (7 percent overall and 15 
percent in information), Singapore (10 percent in computer and 
electronic products), and Malaysia (5 percent in computer and 
electronic products), these countries each accounted for 3 percent or 
less of MOFA expenditures in ICT-related industries (see table 6). 
China accounts for about 3 percent of manufacturing, but details are 
not available for computers and electronic products. India accounts for 
less than 1 percent of R&D expenditures across most industries (note 
that in the computers and electronic products and professional, 
technical, and scientific industries, where amounts were suppressed in 
2003 for India, prior years also showed less than 1 percent). 

Table 6: Share of U.S. Companies' Foreign Affiliates' R&D Expenditures, 
by Industry for Selected Asia-Pacific Economies, 2003: 

Country: Australia; 
All industries: 2%; 
Manufacturing: 2%; 
Computers and electronic products: 0%; 
Information: 0%; 
Professional, technical, scientific: N/A. 

Country: China; 
All industries: 3; 
Manufacturing: 3; 
Computers and electronic products: N/A; 
Information: N/A; 
Professional, technical, scientific: 2. 

Country: Hong Kong; 
All industries: 1; 
Manufacturing: 1; 
Computers and electronic products: N/A; 
Information: 0; 
Professional, technical, scientific: 1. 

Country: India; 
All industries: 0; 
Manufacturing: 0; 
Computers and electronic products: N/A; 
Information: 0; 
Professional, technical, scientific: N/A. 

Country: Indonesia; 
All industries: 0; 
Manufacturing: 0; 
Computers and electronic products: 0; 
Information: 0; 
Professional, technical, scientific: 0. 

Country: Japan; 
All industries: 7; 
Manufacturing: 7; 
Computers and electronic products: 6; 
Information: 15; 
Professional, technical, scientific: 2. 

Country: Korea, Republic of; 
All industries: 1; 
Manufacturing: 1; 
Computers and electronic products: 2; 
Information: N/A; 
Professional, technical, scientific: 1. 

Country: Malaysia; 
All industries: 1; 
Manufacturing: 1; 
Computers and electronic products: 5; 
Information: 0; 
Professional, technical, scientific: 0. 

Country: New Zealand; 
All industries: 0; 
Manufacturing: 0; 
Computers and electronic products: 0; 
Information: 0; 
Professional, technical, scientific: 0. 

Country: Philippines; 
All industries: 0; 
Manufacturing: 0; 
Computers and electronic products: 1; 
Information: 0; 
Professional, technical, scientific: 0. 

Country: Singapore; 
All industries: 2; 
Manufacturing: 3; 
Computers and electronic products: 10; 
Information: 1; 
Professional, technical, scientific: 0. 

Country: Taiwan; 
All industries: 0; 
Manufacturing: 0; 
Computers and electronic products: 0; 
Information: 1; 
Professional, technical, scientific: 0. 

Country: Thailand; 
All industries: 0%; 
Manufacturing: 0%; 
Computers and electronic products: 0%; 
Information: 0%; 
Professional, technical, scientific: 0%. 

Source: BEA. 

Note: Data for 2003 are preliminary. "N/A" indicates that the data have 
been suppressed by BEA to avoid disclosure of data of individual 
companies. 

[End of table] 

[End of section] 

Appendix III: Larger Imports of Information and Communication Goods 
Drive the U.S. Advanced Technology Product Deficit: 

Since 1989, Commerce's Bureau of the Census (Census) has identified 
products that use leading edge technologies or innovations. Commerce 
classifies these goods as Advanced Technology Products (ATP). 
Currently, Census identifies about 500 of some 22,000 10-digit 
commodity U.S. merchandise trade classification codes as ATP codes 
because they meet the following criteria: (1) the code contains 
products from 1 of 10 recognized high technology fields such as 
electronics (which includes semiconductors) and information and 
communications (which includes notebook computers and cell phones), (2) 
these products represent leading-edge technology in that field, and (3) 
these products constitute a significant part of all items in the 
selected classification code. 

Partly as a consequence of the growing movement of electronics assembly 
to Asia, and China in particular, in 2005, the United States trade 
deficit with China in the ATP information and communications group, 
$51.5 billion, is slightly larger than the overall ATP deficit with 
China, $48.4 billion, and about 25 percent of the overall goods 
deficit, $203.8 billion, all of which have dramatically grown in recent 
years.[Footnote 38] Finished products--such as notebook computers and 
cell phones--are the largest U.S. information and communication ATP 
imports from China in 2005. Computer parts and accessories are the 
leading U.S. exports to China in this group. U.S. exports, imports, and 
the trade balance with China in this group are depicted in figure 15. 
This figure shows both the rapid growth in imports of these products 
from China, as well as the rising trade deficit.[Footnote 39] 

Figure 15: U.S. ATP Information and Communications Trade with China: 

[See PDF for image] 

Source: GAO analysis of Census data. 

[End of figure] 

In contrast, in the ATP electronics group, beginning in 2001, the 
United States has a trade surplus with China, largely due to the 
substantial exports of semiconductor wafers and integrated circuits to 
China. (See fig. 16.) However, this surplus of about $1 billion in 2003 
has been declining somewhat in recent years. This current trade surplus 
is partly a result of slower growing U.S. demand for finished 
integrated circuits by downstream manufacturers of consumer 
electronics, as discussed previously. 

Figure 16: U.S. ATP Electronics Trade with China: 

[See PDF for image] 

Source: GAO analysis of Census data. 

[End of figure] 

The overall ATP trade deficit with China (as well as Asia overall) is 
largely due to information and communications imports. However, trade 
statistics rarely separate out the value of imported components 
embodied in finished products. Therefore, some part of the value of 
U.S. imports of information and communications products from China is 
attributable to U.S. exports of chips and wafers (and other ATP 
components) directly to China or indirectly through other Asian 
countries. However, to be a leading-edge product, Census must judge the 
product itself to use leading-edge technology, not simply some of its 
components. For example, although autos have many leading-edge 
components such as semiconductors and integrated circuits, autos are 
not leading-edge products. 

[End of section] 

Appendix IV: Comments from the Department of Commerce: 

The Deputy Secretary Of Commerce: 
Washington, D.C. 20230: 

August 7, 2006: 

Mr. Loren Yager: 
U.S. Government Accountability Office: 
Director, International Affairs and Trade Issues: 
Washington, DC 20548: 

Dear Mr. Yager: 

Thank you for the opportunity to review and comment on GAO's draft 
report, "Offshoring: U.S. Semiconductor and Software Industries 
Increasingly Produce in China and India" (GAO-06-423). I enclose the 
Department of Commerce's comments. 

The Department of Commerce welcomes your findings that the United 
States remains one of the world's largest and most advanced producers 
of semiconductors and software services, despite increased global 
competition. We also agree that U.S. industry's ability to compete will 
depend on investment in research and development, an innovative 
academic environment, and a competitive business environment. 

This report will provide Congress with a better understanding of 
offshoring in the semiconductor and software services industries. We 
look forward to the publication of your final report in September 2006. 

Sincerely, 

Signed by: 

David A. Sampson: 

Enclosure: 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Loren Yager, Director, (202) 512-4128, yagerl@gao.gov: 

Staff Acknowledgments: 

In addition to the individual named above, Virginia Hughes, Assistant 
Director; Bradley Hunt; Ernie Jackson; Sona Kalapura; Judith Knepper, 
Analyst-in-Charge; Lynn Cothern; Yesook Merrill; Berel Spivack; and Tim 
Wedding made major contributions to this report. 

[End of section] 

Related GAO Products: 

Offshoring: 

Offshoring in Six Human Services Programs: Offshoring Occurs in Most 
States, Primarily in Customer Service and Software Development. GAO-06- 
342. Washington, D.C.: Mar. 28, 2006. 

Offshoring of Services: An Overview of the Issues. GAO-06- 5. 
Washington, D.C.: Nov. 28, 2005. 

International Trade: U.S. and India Data on Offshoring Show Significant 
Differences. GAO-06-116. Washington, D.C.: Oct. 27, 2005. 

International Trade: Current Government Data Provide Limited Insight 
into Offshoring of Services. GAO-04-932.Washington, D.C.: Sept. 22, 
2004. 

Highlights of a GAO Forum: Workforce Challenges and Opportunities For 
21st Century: Changing Labor Force Dynamics and the Role of Government 
Polices. GAO-04-845SP. Washington, D.C.: June 1, 2004. 

China: 

China Trade: U.S. Exports, Investment, Affiliate Sales Rising, but 
Export Share Falling. GAO-06-162. Washington, D.C.: Dec. 9, 2005. 

U.S.-China Trade: Opportunities to Improve U.S. Government Efforts to 
Ensure Open and Fair Markets., GAO-05-554T. Washington, D.C.: Apr. 14, 
2005. 

U.S.-China Trade: Observations on Ensuring China's Compliance with 
World Trade Organization Commitments. GAO-05-295T. Washington, D.C.: 
Feb. 4, 2005. 

U.S.-China Trade: Opportunities to Improve U.S. Government Efforts to 
Ensure China's Compliance with World Trade Organization Commitments. 
GAO-05-53. Washington, D.C.: Oct. 6, 2004. 

World Trade Organization: U.S. Companies' Views on China's 
Implementation of Its Commitments. GAO-04-508. Washington, D.C.: Mar. 
24, 2004. 

Export Controls: Rapid Advances in China's Semiconductor Industry 
Underscore Need for Fundamental U.S. Policy Review. GAO-02- 620. 
Washington, D.C.: Apr. 19, 2002. 

Semiconductors: 

Export Controls: System for Controlling Exports of High Performance 
Computing Is Ineffective. GAO-01-10. Washington, D.C.: Dec. 18, 2000. 

Federal Research: SEMATECH's Technological Progress and Proposed R&D 
Program. RCED- 92-223BR. Washington, D.C.: July 16, 1992. 

Federal Research: SEMATECH's Efforts to Strengthen the U.S. 
Semiconductor Industry. RCED-90-236. Washington, D.C.: Sept. 13, 1990. 

(320299): 

FOOTNOTES 

[1] GAO, International Trade: Current Government Data Provide Limited 
Insight into Offshoring of Services, GAO-04-932 (Washington, D.C.: 
Sept. 22, 2004); GAO, International Trade: U.S. and India Data on 
Offshoring Show Significant Differences, GAO-06-116 (Washington, D.C.: 
Oct. 27, 2005); and GAO, Offshoring of Services: An Overview of the 
Issues, GAO-06-5 (Washington, D.C.: Nov. 28, 2005). See also Related 
GAO Products at the end of this report. 

[2] For a discussion of definitions of offshoring and outsourcing, see 
GAO, International Trade: Current Government Data Provide Limited 
Insight into Offshoring of Services, GAO-04-932 (Washington, D.C.: 
Sept. 22, 2004), p. 55. 

[3] Moving from an 8-inch (or 200 millimeter) wafer to a 12-inch (or 
300 millimeter) wafer increases the number of semiconductor chips by 
2.25 times. 

[4] For example, see Dale Jorgenson "Information Technology and the 
U.S. Economy" American Economic Review, March 2001, 91(1), pp.1-32, and 
Kevin Stiroh "Information Technology and the U.S. Productivity Revival: 
What Do the Industry Data Say?" American Economic Review, December 
2002, 92(5), pp.1,559-1,576. 

[5] However, IDMs may also use foundries in addition to their own 
fabrication plants to handle excess demand or certain production runs 
that are not economical for the IDM to produce. 

[6] Semiconductor manufacturing plants cost about $3 billion, with 
labor costs contributing between 5 and 10 percent. 

[7] Chung Chen, Andrew and Woetzel, Jonathan R., McKinsey & Co., "Chips 
Fall Toward Design," (South China Morning Post: Mar. 11, 2002). 

[8] See "Framing the Engineering Outsourcing Debate: Placing the United 
States on a Level Playing Field with China and India" (Duke University: 
December 2005). This study indicates that China reported a total of 
644,106 engineering graduates in 2004, but that data included those 
with education and training that differ from that attained in U.S. 
engineering degree programs. We report these data, which are based on a 
comparison of equivalent engineering programs. For information on U.S. 
higher education programs related to science and technology, also see 
GAO, Higher Education: Federal Science, Technology, Engineering, and 
Mathematics Programs and Related Trends, GAO-06-114 (Washington, D.C.: 
Oct. 12, 2005). 

[9] NASSCOM, Strategic Review 2005: The IT Industry in India (New 
Delhi: 2005). 

[10] CMM was established in 1984 through Carnegie Mellon's Software 
Engineering Institute. The CMM is a framework that describes the key 
elements of an effective software process. The model was updated to the 
CMMI in 2000. The CMMI provides companies with guidance for improving 
their processes and managing the development, acquisition, and 
maintenance of products and services. 

[11] Howell, Thomas R., testimony to the Committee on Commerce, 
Subcommittee on Technology, Innovation and Competitiveness, Hearing on 
Manufacturing Competitiveness, June 8, 2005 (Washington, D.C.) "Close 
followership" refers to firms that closely align themselves with their 
customer, adopting technology soon after the customer. 

[12] System-on-a-chip design integrates computer components on a single 
chip. It may contain digital, analog, mixed-signal and radio frequency 
functions. 

[13] Currently, wafer technology using at most .25 micron circuitry may 
be transferred to the mainland. In February 2006, Taiwan levied a fine 
of about $155,000 on a leading Taiwanese firm that aided in the 
establishment of a Chinese chipmaker without Taiwan's approval in 
violation of its statute governing relationships between people in 
Taiwan and people on the mainland. 

[14] In July 2004, China and the United States resolved the World Trade 
Organization dispute over China's differential value-added tax, which 
had disadvantaged U.S. and other foreign firms whose semiconductors 
were not designed or produced in China. According to experts, China has 
implemented this agreement. 

[15] Taiwan's supplier relationship with the U.S. microelectronics 
industry is under pressure from the new opportunities for U.S. (and 
other) firms in China. According to one U.S. legal analysis, Taiwan has 
placed legal restrictions on the level of technology which its own 
firms may transfer to mainland China. 

[16] See Clair Brown and Greg Linden, "Offshoring in the Semiconductor 
Industry: A Historical Perspective" prepared for the 2005 Brookings 
Trade Forum on Offshoring of White-Collar Work (May 2005). Estimates 
are based on work by Robert Leachman and Chien Leachman, of the 
University of California at Berkeley. 

[17] Systematic data on the location of design work, particular leading 
edge product innovation, is not readily available. Therefore, industry 
experts rely on the location of companies' offices, patent data, and 
interviews with company officials to ascertain where design work is 
being carried out. 

[18] According to the Association of Computing Machinery (ACM), an 
industry association, U.S. firms make up 11 of the top 15 software 
companies (both packaged and custom services), with the remaining 4 
companies from Germany, Japan, and France. See ACM, Globalization and 
Offshoring of Software: A Report of the ACM Job Migration Task Force 
(www.acm.org, March 2006). 

[19] See McKinsey Global Institute, The Emerging Global Labor Market: 
Part I--The Demand for Offshore Talent in Services (www.mckinsey.com/ 
mgi: June 2005). 

[20] In November 2002, BLS's Occupational Employment Statistics Survey 
changed from an annual survey to a semiannual survey. 

[21] The National Bureau of Economic Research's Business Cycle Dating 
Committee determined that a trough in business activity occurred in the 
U.S. economy in November 2001 marking the end of the recession that 
began in March that year. 

[22] Database administrators identify user requirements and set up and 
administer computer database systems. 

[23] Daniel Hecker, "Occupational Employment Projection to 2014," 
Monthly Labor Review, November 2005, Bureau of Labor Statistics. 

[24] See GAO-06-116. This report also highlights limitations in the 
data of services trade and the significantly larger exports statistics 
reported by India. 

[25] BEA reported U.S. affiliated and unaffiliated exports of computer 
and information services (which includes computer and data processing 
services) at $8.5 billion in 2004. Census reported U.S. exports by 
custom computer programming services and software publishers at $21.6 
billion. Some of this discrepancy is accounted for by differences in 
the treatment of packaged software, classifications, and survey 
samples. For example, BEA's statistics exclude computer software that 
is physically shipped and considered a good rather than a service. 

[26] For example, see the discussion of the discrepancies between U.S. 
and Indian services trade data in GAO-06-116. 

[27] However, measuring the individual contribution of any one of these 
factors on the development of the semiconductor and software 
industries, as well as their future importance to these industries, is 
beyond the scope of this report. 

[28] Although we discuss several indicators of innovation in this 
section, there are a variety of measures available. See for example, 
National Science Board, Science and Engineering Indicators, 2006 
(Washington, D.C.: National Science Foundation, 2006) available at 
www.nsf.gov. Also, it is important to note that each of these 
indicators provides only a limited measure of certain aspects of 
innovation, which is a broad and elusive concept. For a comparison of 
R&D globalization across countries, see Swedish Institute for Growth 
Policy Studies, The Internationalization of Corporate R&D (Stockholm, 
ITPS, 2006) available at www.itps.se. 

[29] See, for example, Rising Above The Gathering Storm: Energizing and 
Employing America for a Brighter Economic Future (Washington, D.C.: 
National Academy Press, February 2006), America's Pressing Challenge - 
Building a Stronger Foundation: A Companion to Science and Engineering 
Indicators 2006 (Washington, D.C.: National Science Board, January 
2006), and Sustaining the Nation's Innovation Ecosystems, Report on 
Information Technology Manufacturing and Competitiveness, (Washington, 
D.C.: President's Council of Advisors on Science and Technology, 
January 2004). 

[30] For additional information of the U.S. visa program, see GAO, 
Border Security: Streamlined Visas Mantis Program Has Lowered Burden on 
Foreign Science Students and Scholars, but Further Refinements Needed, 
GAO-05-198 (Washington, D.C.: Feb. 18, 2005) and GAO, Border Security: 
Improvements Needed to Reduce Time Taken to Adjudicate Visas for 
Science Students and Scholars, GAO-04-371 (Washington D.C.: Feb. 25, 
2004). 

[31] Investment abroad--establishing a foreign located affiliate of a 
parent company--is one means of offshoring parts of the production 
process. The other main means is to contract with an independent 
company, which is not captured in investment statistics. In addition, 
companies may devise hybrids of these two approaches, such as 
establishing a joint venture. Information provided in this appendix 
only relates to offshoring through a foreign affiliate and not 
offshoring that may occur through an unaffiliated provider that 
replaces domestic production and employment. For more information on 
definitions of offshoring, see GAO-04-932, appendix II. 

[32] Direct investment abroad statistics on an historic cost basis, as 
reported here, will exclude the value of U.S. investments in particular 
countries if that investment is made through holding companies located 
in other countries. The U.S. investment will be attributed to the 
country of the holding company. 

[33] Detailed direct investment abroad statistics on the semiconductor 
industry by country are not available. 

[34] Singapore was the largest location of U.S. direct investment 
abroad as of 2004 in this industry. Ireland (12 percent), Canada (10 
percent), and Italy (10 percent) were the next largest locations by 
value. 

[35] BEA data include total employment in U.S. MNC's parent operations 
(located in the United States) and majority-owned foreign affiliates 
(located in foreign countries). 

[36] BEA's statistics capture U.S. MNCs and their majority-owned 
foreign affiliates in the semiconductor and other electronic components 
sector. SIA's statistics capture all U.S.-based semiconductor companies 
(whether or not they have foreign affiliates) and their entire 
employment abroad (which may include less than majority ownership). The 
two statistics differ to some degree in terms of their definition of 
the industry and selection of parent companies and affiliates. 

[37] Software publishing that produces packaged software is included in 
the broad industry sector of Information, while custom software 
services is included in the broader industry sector of professional, 
scientific, and technical services. U.S. direct investment data by 
country are not available below the industry sector level of detail. 

[38] We present narrow definitions of ATP trade statistics--"domestic 
exports" and "imports for consumption" because we wish to exclude flows 
of goods for which the United States is simply a transshipment point. 
Census publishes the broad definition of ATP trade statistics--"total 
exports" and "general imports." Nonetheless in recent years, both 
narrow and broad ATP trade flows with China display similar patterns. 

[39] For more information on the U.S.-China trade and investment 
relationship, see GAO, China Trade: U.S. Exports, Investment and 
Affiliate Sales Rising, but Export Share Falling, GAO-06-162 
(Washington, D.C.: Dec. 9, 2005). 

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