[House Hearing, 110 Congress]
[From the U.S. Government Printing Office]



 
                      THE GLOBALIZATION OF R&D AND
                         INNOVATION, PARTS I-IV

=======================================================================

                                HEARINGS

                               BEFORE THE

                  COMMITTEE ON SCIENCE AND TECHNOLOGY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 12, 2007,
                             JULY 26, 2007,
                            OCTOBER 4, 2007,
                          and NOVEMBER 6, 2007

                               __________

                           Serial No. 110-39,
                           Serial No. 110-49,
                           Serial No. 110-62,
                         and Serial No. 110-71

                               __________

     Printed for the use of the Committee on Science and Technology










     Available via the World Wide Web: http://www.house.gov/science

                                 ______


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                  COMMITTEE ON SCIENCE AND TECHNOLOGY

                 HON. BART GORDON, Tennessee, Chairman
JERRY F. COSTELLO, Illinois          RALPH M. HALL, Texas
EDDIE BERNICE JOHNSON, Texas         F. JAMES SENSENBRENNER JR., 
LYNN C. WOOLSEY, California              Wisconsin
MARK UDALL, Colorado                 LAMAR S. SMITH, Texas
DAVID WU, Oregon                     DANA ROHRABACHER, California
BRIAN BAIRD, Washington              ROSCOE G. BARTLETT, Maryland
BRAD MILLER, North Carolina          VERNON J. EHLERS, Michigan
DANIEL LIPINSKI, Illinois            FRANK D. LUCAS, Oklahoma
NICK LAMPSON, Texas                  JUDY BIGGERT, Illinois
GABRIELLE GIFFORDS, Arizona          W. TODD AKIN, Missouri
JERRY MCNERNEY, California           JO BONNER, Alabama
LAURA RICHARDSON, California         TOM FEENEY, Florida
PAUL KANJORSKI, Pennsylvania         RANDY NEUGEBAUER, Texas
DARLENE HOOLEY, Oregon               BOB INGLIS, South Carolina
STEVEN R. ROTHMAN, New Jersey        DAVID G. REICHERT, Washington
JIM MATHESON, Utah                   MICHAEL T. MCCAUL, Texas
MIKE ROSS, Arkansas                  MARIO DIAZ-BALART, Florida
BEN CHANDLER, Kentucky               PHIL GINGREY, Georgia
RUSS CARNAHAN, Missouri              BRIAN P. BILBRAY, California
CHARLIE MELANCON, Louisiana          ADRIAN SMITH, Nebraska
BARON P. HILL, Indiana               PAUL C. BROUN, Georgia
HARRY E. MITCHELL, Arizona
CHARLES A. WILSON, Ohio
                                 ------                                

               Subcommittee on Technology and Innovation

                    HON. DAVID WU, Oregon, Chairman
JIM MATHESON, Utah                   PHIL GINGREY, Georgia
HARRY E. MITCHELL, Arizona           VERNON J. EHLERS, Michigan
CHARLIE A. WILSON, Ohio              JUDY BIGGERT, Illinois
BEN CHANDLER, Kentucky               ADRIAN SMITH, Nebraska
MIKE ROSS, Arizona                   PAUL C. BROUN, Georgia
LAURA RICHARDSON, California           
BART GORDON, Tennessee               RALPH M. HALL, Texas
                 MIKE QUEAR Subcommittee Staff Director
      RACHEL JAGODA BRUNETTE Democratic Professional Staff Member
          COLIN MCCORMICK Democratic Professional Staff Member
         TIND SHEPPER RYEN Republican Professional Staff Member
           PIPER LARGENT Republican Professional Staff Member
      MEGHAN HOUSEWRIGHT Research Assistantcontents deg.






















                            C O N T E N T S

                             June 12, 2007

                                                                   Page
Witness List.....................................................     2

Hearing Charter..................................................     3

                           Opening Statements

Statement by Representative Bart Gordon, Chairman, Committee on 
  Science and Technology, U.S. House of Representatives..........     6
    Written Statement............................................     7

Statement by Representative Ralph M. Hall, Ranking Minority 
  Member, Committee on Science and Technology, U.S. House of 
  Representatives................................................     8
    Written Statement............................................     9

Prepared Statement by Representative Russ Carnahan, Member, 
  Committee on Science and Technology, U.S. House of 
  Representatives................................................    10

                               Witnesses:

Dr. Alan S. Blinder, Director, Center for Economic Policy 
  Studies; Gordon S. Rentschler Memorial Professor of Economics, 
  Princeton University
    Oral Statement...............................................    10
    Written Statement............................................    14
    Biography....................................................    17

Dr. Martin N. Baily, Senior Fellow, Peter G. Peterson Institute 
  for International Economics, Washington, DC
    Oral Statement...............................................    18
    Written Statement............................................    21

Dr. Ralph E. Gomory, President, Alfred P. Sloan Foundation
    Oral Statement...............................................    28
    Written Statement............................................    30
    Biography....................................................    35

Dr. Thomas J. Duesterberg, President and CEO, Manufacturers 
  Alliance/MAPI
    Oral Statement...............................................    36
    Written Statement............................................    39
    Biography....................................................    54

Discussion.......................................................    55

             Appendix 1: Answers to Post-Hearing Questions

Dr. Alan S. Blinder, Director, Center for Economic Policy 
  Studies; Gordon S. Rentschler Memorial Professor of Economics, 
  Princeton University...........................................    64

Dr. Martin N. Baily, Senior Fellow, Peter G. Peterson Institute 
  for International Economics, Washington, DC....................    65

Dr. Ralph E. Gomory, President, Alfred P. Sloan Foundation.......    68

Dr. Thomas J. Duesterberg, President and CEO, Manufacturers 
  Alliance/MAPI..................................................    84

             Appendix 2: Additional Material for the Record

Statement of the Computing Research Association..................    92




























                            C O N T E N T S

                             July 26, 2007

                                                                   Page
Witness List.....................................................   100

Hearing Charter..................................................   101

                           Opening Statements

Statement by Representative Bart Gordon, Chairman, Committee on 
  Science and Technology, U.S. House of Representatives..........   104
    Written Statement............................................   104

Statement by Representative Ralph M. Hall, Ranking Minority 
  Member, Committee on Science and Technology, U.S. House of 
  Representatives................................................   106
    Written Statement............................................   108

Statement by Representative Brian Baird, Chairman, Subcommittee 
  on Research and Science Education, Committee on Science and 
  Technology, U.S. House of Representatives......................   104
    Written Statement............................................   106

Prepared Statement by Representative Jerry F. Costello, Member, 
  Committee on Science and Technology, U.S. House of 
  Representatives................................................   108

Prepared Statement by Representative Eddie Bernice Johnson, 
  Member, Committee on Science and Technology, U.S. House of 
  Representatives................................................   109

                               Witnesses:

Dr. David J. Skorton, President, Cornell University
    Oral Statement...............................................   110
    Written Statement............................................   112
    Biography....................................................   125

Dr. Gary Schuster, Provost and Vice President for Academic 
  Affairs, Georgia Institute of Technology
    Oral Statement...............................................   125
    Written Statement............................................   127
    Biography....................................................   131

Mr. Mark G. Wessel, Dean, H. John Heinz III School of Public 
  Policy and Management, Carnegie Mellon University
    Oral Statement...............................................   132
    Written Statement............................................   134
    Biography....................................................   139

Dr. Philip G. Altbach, Director, The Center for International 
  Higher Education; J. Donald Monan SJ Professor of Higher 
  Education, Boston College
    Oral Statement...............................................   140
    Written Statement............................................   142
    Biography....................................................   167

Discussion.......................................................   167

              Appendix: Answers to Post-Hearing Questions

Dr. Gary Schuster, Provost and Vice President for Academic 
  Affairs, Georgia Institute of Technology.......................   184

Mr. Mark G. Wessel, Dean, H. John Heinz III School of Public 
  Policy and Management, Carnegie Mellon University..............   188

Dr. Philip G. Altbach, Director, The Center for International 
  Higher Education; J. Donald Monan SJ Professor of Higher 
  Education, Boston College......................................   191




























                            C O N T E N T S

                            October 4, 2007

                                                                   Page
Witness List.....................................................   194

Hearing Charter..................................................   195

                           Opening Statements

Statement by Representative David Wu, Chairman, Subcommittee on 
  Technology and Innovation, Committee on Science and Technology, 
  U.S. House of Representatives..................................   198
    Written Statement............................................   199

Statement by Representative Phil Gingrey, Ranking Minority 
  Member, Subcommittee on Technology and Innovation, Committee on 
  Science and Technology, U.S. House of Representatives..........   200
    Written Statement............................................   201

Prepared Statement by Representative Harry E. Mitchell, Member, 
  Subcommittee on Technology and Innovation, Committee on Science 
  and Technology, U.S. House of Representatives..................   202

Prepared Statement by Representative Laura Richardson, Member, 
  Subcommittee on Technology and Innovation, Committee on Science 
  and Technology, U.S. House of Representatives..................   202

                               Witnesses:

Dr. Martin Kenney, Professor, Department of Human and Community 
  Development, University of California, Davis
    Oral Statement...............................................   204
    Written Statement............................................   206
    Biography....................................................   220

Dr. Robert D. Atkinson, President, Information Technology and 
  Innovation Foundation
    Oral Statement...............................................   220
    Written Statement............................................   222
    Biography....................................................   232

Mr. Steve Morris, Executive Director, Open Technology Business 
  Center (OTBC); Managing Director, OregonStartups.com
    Oral Statement...............................................   233
    Written Statement............................................   235
    Biography....................................................   240

Mr. Mark M. Sweeney, Founder, Co-Owner and Senior Principal, 
  McCallum Sweeney Consulting
    Oral Statement...............................................   241
    Written Statement............................................   243
    Biography....................................................   245

Dr. Jerry G. Thursby, Professor and Ernest Scheller, Jr. Chair of 
  Innovation, Entrepreneurship, and Commercialization, Georgia 
  Institute of Technology
    Oral Statement...............................................   245
    Written Statement............................................   247
    Biography....................................................   261

Discussion.......................................................   261






















                            C O N T E N T S

                            November 6, 2007

                                                                   Page
Witness List.....................................................   272

Hearing Charter..................................................   273

                           Opening Statements

Statement by Representative David Wu, Chairman, Subcommittee on 
  Technology and Innovation, Committee on Science and Technology, 
  U.S. House of Representatives..................................   276
    Written Statement............................................   277

Statement by Representative Phil Gingrey, Ranking Minority 
  Member, Subcommittee on Technology and Innovation, Committee on 
  Science and Technology, U.S. House of Representatives..........   277
    Written Statement............................................   279

Prepared Statement by Representative Harry E. Mitchell, Member, 
  Subcommittee on Technology and Innovation, Committee on Science 
  and Technology, U.S. House of Representatives..................   280

Prepared Statement by Representative Adrian Smith, Member, 
  Subcommittee on Technology and Innovation, Committee on Science 
  and Technology, U.S. House of Representatives..................   280

                               Witnesses:

Dr. Michael S. Teitelbaum, Vice President, Alfred P. Sloan 
  Foundation
    Oral Statement...............................................   281
    Written Statement............................................   284
    Biography....................................................   290

Dr. Charles W. McMillion, President and Chief Economist, MBG 
  Information Services
    Oral Statement...............................................   291
    Written Statement............................................   293
    Biography....................................................   306

Dr. Harold Salzman, Senior Research Associate, The Urban 
  Institute
    Oral Statement...............................................   307
    Written Statement............................................   309
    Biography....................................................   335

Mr. Paul J. Kostek, Vice President, Career Activities, The 
  Institute of Electrical and Electronics Engineers-United States 
  of America
    Oral Statement...............................................   335
    Written Statement............................................   337
    Biography....................................................   341

Mr. Henry S. Becker, President, Qimonda North America Corp.
    Oral Statement...............................................   342
    Written Statement............................................   344
    Biography....................................................   347

Discussion.......................................................   347






















            THE GLOBALIZATION OF R&D AND INNOVATION, PART I

                              ----------                              


                         TUESDAY, JUNE 12, 2007

                  House of Representatives,
                       Committee on Science and Technology,
                                                    Washington, DC.

    The Committee met, pursuant to call, at 1:10 p.m., in Room 
2318 of the Rayburn House Office Building, Hon. Bart Gordon 
[Chairman of the Committee] presiding.



                            hearing charter

                  COMMITTEE ON SCIENCE AND TECHNOLOGY

                     U.S. HOUSE OF REPRESENTATIVES

                          The Globalization of

                       R&D and Innovation, Part I

                         tuesday, june 12, 2007
                          1:00 p.m.-3:00 p.m.
                   2318 rayburn house office building

1. Purpose

    On Tuesday, June 12, 2007, the Committee on Science and Technology 
will hold a hearing to consider the implications of innovation 
offshoring for U.S. workers and the economy. Technological innovation 
is the key to improving America's standard of living, but science and 
engineering work--the fundamental building block of innovation--has 
become increasingly vulnerable to offshoring. This hearing will explore 
the implications of this trend on the U.S. workforce, the U.S. science 
and engineering education pipeline, competitiveness, economic growth, 
and our innovation system.

2. Witnesses

Dr. Alan S. Blinder is Professor of Economics at Princeton University 
and director of Princeton's Center for Economic Policy Studies. He 
served as Vice Chairman of the Board of Governors of the Federal 
Reserve System from June 1994 until January 1996.

Dr. Ralph E. Gomory is President of the Alfred P. Sloan Foundation. He 
was Director of Research at IBM Corporation from 1970 to 1986.

Dr. Martin N. Baily is senior fellow at the Peterson Institute for 
International Economics and senior adviser to McKinsey Global 
Institute. He was Chair of the President's Council of Economic Advisers 
from 1999 to 2001.

Dr. Thomas J. Duesterberg is the President and CEO of the Manufacturers 
Alliance/MAPI.

3. Brief Overview

          Some analysts estimate that between 30 to 40 percent 
        of all U.S. jobs will be vulnerable to offshoring. This 
        vulnerability means that a large share of previously non-
        tradable jobs are now tradable, putting downward pressures on 
        wages for U.S. workers in those occupations. Other analysts 
        dispute these estimates, claiming they are too high.

          Science, technology, engineering and mathematics 
        (STEM) jobs are amongst the most vulnerable to offshoring, with 
        computer programming topping the list of all occupations. 
        According to a study conducted by Alan Blinder, nearly all (35 
        of 39) STEM occupations are offshorable, including 10 of 12 
        engineering disciplines.

          High-wage jobs, requiring advanced education and 
        skills, are also offshorable, so more education and training 
        will not necessarily immunize workers against offshoring. 
        Instead, some have suggested that we refocus our educational 
        investments towards training for jobs that will be difficult to 
        offshore.

          There is no consensus on the likely impacts of 
        offshoring. Some argue that it will be as dramatic as the 
        industrial revolution, requiring significant policy changes, 
        while others view it as a minor phenomenon. The ambiguity is 
        aggravated by the very poor quality data we have about 
        offshoring.

          China, India and other developing countries have 
        government policies to actively attract innovation jobs and 
        work. For example, the Chinese government often requires 
        technology transfer as a condition on investments in China by 
        multinational corporations, and India offers tax holidays for 
        any exports from its information technology services industry.

3. Background

    Several analysts, using a variety of estimating methods, have 
separately concluded that a significant share of U.S. jobs is 
vulnerable to offshoring. Vulnerability means that jobs that were once 
safe from being relocated offshore or competition from workers in other 
countries are no longer so. While the independent estimates by 
economists such as Alan Blinder, Lori Kletzer, Robert Atkinson, and 
Ashok Bardhan, cover a wide range, from 20 to 40 percent of U.S. jobs, 
even the low-end estimates indicate that tens of millions of jobs can 
be affected by offshoring. Dr. Blinder finds that nearly all (35 of 39) 
STEM occupations are offshorable. Particular occupations are highly 
vulnerable. For example, seven of the 11 computer-related occupations 
are considered highly vulnerable, with computer programming topping the 
list for all occupations. Dr. Blinder also finds that 10 of the 12 
engineering occupations are offshorable, including biomedical and 
electronics engineering; fields where the U.S. currently holds 
technological leadership. The two exceptions are aerospace and health 
and safety engineering.
    Newspaper reports and company announcements seem to confirm that 
the offshoring of high-skill high-technology work is increasing, with 
even research moving offshore. For example, Accenture's CEO announced 
that it will have more workers in India than any other country, 
including the U.S., by this August. And IBM is projected to have 
100,000 workers in India by 2010, more than one-quarter of its 
workforce, rivaling the U.S. as the leading country for workers. At the 
same time, firms are investing in plants and R&D facilities in low-cost 
countries. Companies like General Electric, Eli Lilly, Google, and 
Microsoft are expanding R&D centers in India and China, which will work 
on cutting edge research and new product development rivaling their 
centers in the U.S. A recent University of Texas study found that of 
the 57 major announcements of locations of global telecom R&D 
facilities in the past year, more than 60 percent (35) were located in 
Asia, whereas, a meager nine percent (five) were located in the U.S.
    The consequences of these changes are still being sorted out. Some 
predict that in the long run we will be better off at the new 
equilibrium, but the road to that new equilibrium will be very bumpy, 
causing great hardships for many. Others agree that the new equilibrium 
will be better but also assert that the scale and speed of offshoring 
has been exaggerated. They emphasize the flexibility of the U.S. 
economy and labor markets, buffering workers from any significant 
hardships, and they point to all of the new opportunities and markets 
that globalization create. Still others disagree with the notion that 
the new equilibrium for the U.S. will actually be better with 
offshoring. They say losing our technological leadership in STEM fields 
could make us worse off as offshoring erodes our comparative 
advantages.
    Nearly everyone agrees about a few things. First, the quality of 
the data on offshoring is very poor. This makes it difficult to discern 
the trajectory for offshoring. Second, technologically driven 
innovation is the key to improving America's standard of living. Third, 
STEM education will play a key role in our future competitiveness. But 
according to the Computing Research Association (CRA), enrollment in 
computer science programs is down an astounding 40 percent over the 
past four years. One of the reasons that students shy away from these 
and other STEM majors is the fear and uncertainty surrounding long-term 
career stability. In response to concerns about offshoring, a number of 
universities have changed course curricula for vulnerable fields. Some 
are substituting management courses for technical ones or creating 
interdisciplinary programs; for example, integrating biology into 
traditional electrical engineering curricula. Both measures are 
predicated on the hope that they will better inoculate students from 
offshoring. However, the changes are based on little objective 
information, leaving open the question of whether students, educators, 
and workers are making informed decisions.

4. Issues and Concerns

What is the scale and the scope of offshoring in science and 
engineering jobs and work? What is its potential?

    The amount of offshoring will determine the impact on the U.S., but 
we do not have reliable data and forecasts. Some analysts believe that 
offshoring's impact will be something akin to the industrial 
revolution, while others claim it is too small to worry about.

What are offshoring's expected effects on the U.S. economy and 
workforce?

    While many believe that increased international trade guarantees a 
`win-win' for both countries, economic theory is more ambiguous. A 
country that loses its comparative advantages to trading partners can 
experience lower standards of living. Given that science and 
engineering is our core competency and drives our comparative 
advantages, will offshoring R&D and innovation undercut these 
advantages, resulting in losses for the U.S. as a whole?

How much R&D is being offshored?

    A recent University of Texas study found that of the 57 major 
announcements of locations of global telecom R&D facilities in the past 
year, more than 60 percent (35) were located in Asia, whereas, a meager 
nine percent (five) were located in the U.S. Since innovation is key to 
economic growth, should we be especially concerned by these trends? Do 
we need policies to keep R&D in the U.S.? For R&D that is being done 
offshore, do we have the infrastructure to capture and assimilate it?

Does offshoring of science and engineering lead to lesser spillover 
benefits from R&D?

    The primary rationale for government subsidies of R&D is the 
capture of downstream benefits by companies operating in the U.S. Does 
offshoring of science and engineering work mean that those benefits are 
more likely to quickly leak outside the country?

What policies are other countries using to attract innovation work?

    China, India and other developing countries have government 
policies to actively attract innovation jobs and work. For example, the 
Chinese government often requires technology transfer as a condition on 
investments in China by multinational corporations, and India offers 
tax holidays for any exports from its information technology services 
industry. Do these policies meet the principles of free trade? Should 
we be adopting similar measures? What criteria do companies use to make 
decisions about locating their innovation work?

What STEM fields are most vulnerable?

    Computer science undergraduate enrollments are down 40 percent in 
the past four years, but not because our K-12 education system has not 
adequately prepared students. Instead, the culprit has been fear by 
students that their future jobs might be offshored. Is this fear well-
founded? Students, educators and workers need better data and estimates 
to make informed career and educational choices. How do we ensure that 
STEM fields are still attractive?

Should we be investing in all STEM fields or only those where we expect 
will be rooted in America?

    Should a reallocation of resources be made to concentrate efforts 
on the fields that are most likely to stay in the U.S.? Should 
educators adjust their curricula to teach skills that buffer workers 
from offshoring? If so, what content should it have?

What happens to STEM workers who are displaced?

    One of the expected outcomes of offshoring is displacement of 
incumbent STEM workers. How many of these workers re-enter the STEM 
workforce? At what pay level? Are STEM workers hurt even worse than the 
typical worker by extended periods of unemployment given how quickly 
technological obsolescence occurs?

Do corporate interests diverge from the country's long-term interest in 
offshoring?

    Companies seek competitive advantages by moving operations 
offshore, but increasing the competitiveness of a company may not 
directly translate into increased competitiveness of the country. Where 
do these interests diverge and how should they be reconciled?
    Chairman Gordon. Welcome, everyone, to this afternoon's 
hearing on the offshoring of research, development and 
innovation.
    I also want to welcome our very distinguished witnesses. 
All are leading experts in the impacts of globalization, and we 
look forward to hearing your thoughts.
    As is widely recognized, our competitiveness and our high 
standard of living are derived largely from our technological 
superiority. But almost on a daily basis, we read announcements 
that more high-tech jobs are being offshored to developing 
countries.
    For example, Accenture's CEO announced that it will have 
more employees in India than in the United States by August.
    At the same time, many firms are investing in R&D 
facilities in low-wage developing countries. These centers are 
working on cutting-edge research and new products development 
rivaling their U.S. centers. A recent University of Texas 
study, you will appreciate, found that of the 57 major 
announcements of locations of global technological R&D 
facilities in the past year, more than 60 percent were located 
in Asia versus a mere nine percent located in the United 
States.
    But this seems to be only the tip of the iceberg. One of 
our witnesses, Dr. Alan Blinder, has estimated that more than 
one in four American jobs are vulnerable to offshoring. Even 
more striking is his finding that most American science and 
engineering jobs are vulnerable to offshoring.
    We have already seen how offshoring is adversely affecting 
student choices to pursue science and technology careers. 
According to Computing Research Association, enrollment in 
undergraduate computer science programs has dropped an 
astonishing 40 percent over the last four years.
    And I will make clear that I am not casting blame. 
Companies are simply responding to an increasingly globalized 
marketplace and high-tech workforce. What we want to do is make 
certain that companies find that the U.S. engineers, scientists 
and students are the best in the world. That is the Committee's 
goal. We want to make sure that we enact policies that keep us 
from having to offshore our future.
    Unless the United States maintains its edge in innovation, 
which is founded on a well-trained, creative workforce, the 
best jobs may soon be found offshore. If current trends 
continue, for the first time in our nation's history our 
children may grow up with a lower standard of living than their 
parents.
    There is no single cause for this concern being raised. 
There is no single policy prescription available to address 
them. But looking the other way and hoping for the best is 
irresponsible. The stakes are simply too high to adopt a 
``don't worry, be happy'' approach.
    In this Congress, we have already done a lot of work to 
address this set of issues. We have passed a number of 
legislative initiatives based on the recommendations of experts 
from the National Academies. But this should be viewed only as 
a necessary start. There is much more work to be done.
    Today's hearing is the first in a series of fact-finding 
explorations of the implications of offshoring to U.S. 
competitiveness. We will listen to all sides, soliciting the 
best expertise and advice so that we can develop the policies 
that will lead to a strong economic future for our country.
    [The prepared statement of Chairman Gordon follows:]
               Prepared Statement of Chairman Bart Gordon
    I want to welcome everyone to this afternoon's hearing on the 
offshoring of research and development and innovation.
    I also welcome our distinguished witnesses--all are leading experts 
on the impacts of globalization. We look forward to hearing your 
thoughts on the impacts of offshoring science, engineering, and 
innovation jobs and work.
    The Science and Technology Committee has been working hard to 
address one of the country's most pressing issues, U.S. 
competitiveness. We began addressing this issue in the 109th Congress, 
and are eager to continue our legislative and oversight work.
    As is widely recognized, our competitiveness and high standard of 
living are derived largely from our technological superiority.
    But almost on a daily basis we read announcements that more high-
tech jobs are being offshored to developing countries.
    For example, Accenture's CEO announced that it will have more 
employees in India than the U.S. by this August. And IBM is projected 
to have 100,000 workers in India by 2010, more than one-quarter of its 
worldwide workforce.
    At the same time, firms are investing in R&D facilities in low-
wage, developing countries. Companies like General Electric, Eli Lilly, 
Google, and Microsoft are expanding R&D centers in India and China. 
These centers are working on cutting edge research and new product 
development, rivaling their U.S. centers.
    A recent University of Texas study recently found that of the 57 
major announcements of locations of global telecom R&D facilities in 
the past year, more than 60 percent were located in Asia, versus a 
meager nine percent located in the U.S.
    But this seems to be only the tip of the iceberg.
    One of our witnesses, Dr. Alan Blinder, has estimated that more 
than one in four American jobs are vulnerable to offshoring. Even more 
striking is his finding that most American science and engineering jobs 
are vulnerable to offshoring.
    We're already seeing how offshoring is adversely affecting student 
choices to pursue science and technology careers. According to the 
Computing Research Association, enrollment in undergraduate computer 
science programs has dropped an astonishing 40 percent over the past 
four years.
    Are we offshoring our future?
    I want to make clear that I'm not casting blame or making 
accusations. Companies are simply responding to an increasingly 
globalized marketplace and high-tech workforce.
    What we want to do is make certain that companies find that U.S. 
engineers, scientists, and students are the best in the world. That is 
the Committee's goal. We want to make sure that we enact the policies 
that keep us from offshoring our future.
    Unless the United States maintains its edge in innovation, which is 
founded on a well-trained, creative workforce, the best jobs may soon 
be found overseas. If current trends continue, for the first time in 
our nation's history our children may grow up with a lower standard of 
living than their parents.
    Providing high-quality jobs for hard-working Americans must be our 
first priority. Indeed, it should be the central goal of any policy in 
Congress to advance U.S. competitiveness.
    There is no single cause for the concerns being raised, and there 
is no single policy prescription available to address them.
    But looking the other way and hoping for the best--not to mention 
suppressing government studies--is irresponsible. The stakes are simply 
too high to adopt a ``don't worry be happy'' approach.
    In the last Congress and in the first hundred days of this 
Congress, we've already done a lot of work to address this set of 
issues. We fought hard to get an offshoring report released from the 
Commerce Department which the Administration tried to suppress, and 
we've passed a number of legislative initiatives based on the 
recommendations of experts from the National Academies. But this should 
be viewed only as a necessary start. There is much more work to be 
done.
    Today's hearing is the first in a series of fact-finding 
explorations of the implications of offshoring on U.S. competitiveness. 
We will listen to all sides, soliciting the best expertise and advice, 
so that we can develop the policies that will lead to a strong economic 
future for our country.

    Chairman Gordon. Now I would like to recognize my 
colleague, the Ranking Member from Texas, Mr. Hall, for an 
opening statement.
    Mr. Hall. Mr. Chairman, I thank you, and this must be a 
special group here, a highly recognized group because it is the 
first time in my 27 years I have been here that they have given 
you 10 minutes to state your position, and I am anxious to hear 
it, so I will be as quick as I can--thank you, Mr. Chairman.
    I appreciate you holding this hearing on globalization of 
R&D and innovation, an issue that is going to affect our 
country and economy as we know it for a lot of years to come, 
and this could be one of the most important hearings that we 
have had in a long, long time. I am looking forward to the 
hearing and the statements from all the witnesses, each of whom 
is considered an expert in the field, and I know it is going to 
be an educational and very informative debate.
    I think what we hear today is going to dovetail with some 
of the testimony heard from the authors of ``Rising Above the 
Gathering Storm'' report, and a lot of people have argued that 
we really know very little about the types of jobs that are 
being offshored. Once upon a time, it was thought that only 
low-skilled jobs were in danger of being offshored. However, it 
seems that highly educated people in good-paying jobs are now 
just as threatened by the phenomenon of offshoring.
    Last year China graduated 219,600 engineers representing 39 
percent of all the Bachelor's degrees in that country. The 
United States, on the other hand, graduated only 59,500 
engineers, or five percent of all the Bachelor's degrees. 
Furthermore, 58 percent of all degrees awarded last year in 
China were in physical sciences and engineering compared to 17 
percent in the United States, a figure that is dropping by 
about one percent a year.
    Of the U.S. science and technology workforce, 38 percent of 
the Ph.D.s were foreign born in the year 2000. I don't know 
what it has been in the years since that time, or if there are 
any figures on that, but in this global economy, our children 
are going to be competing head to head with Chinese and Indian 
students, but many say that they aren't taking the necessary 
classes or making their education work for them. When our 
children graduate from high school they have taken consistently 
fewer classes in math and science than their contemporaries 
across the globe. And yet, how much do we really know about 
offshoring?
    Many have argued that we haven't adequately measured the 
effects of offshoring on our workers or on our economy. Our 
government needs to do a better job developing metrics that 
will give us the information we need to make informed decisions 
about trade and the economy.
    Many jobs and many plants have been offshored over the past 
several years and we all know examples from our home states, 
but I think what is even more concerning is the amount of R&D 
that is being permanently offshored and will not be coming back 
to the United States.
    As the authors of ``Rising Above the Gathering Storm'' 
wrote, and I quote, ``It is easy to be complacent about U.S. 
competitiveness and preeminence in science and technology. We 
have led the world for decades and we continue to do so in many 
fields. But the world is changing rapidly, and our advantages 
are no longer unique.''
    So if we continue to lose our R&D and high-tech work to 
foreign competitors, we are going to have a long, steep hill to 
climb to keep our economy going.
    Mr. Chairman, I still applaud you for holding this hearing 
to highlight the issue of globalization and offshoring and I 
look forward to working with you in subsequent hearings on this 
important issue, and I thank these four gentlemen for the time 
it took them to get to the position where they are as important 
as they are and to take their time off here to give us the 
benefits of their knowledge and the time it will take to get 
back to their homes today. I appreciate them and I appreciate 
you.
    I yield back.
    [The prepared statement of Mr. Hall follows:]
           Prepared Statement of Representative Ralph M. Hall
    Thank you Mr. Chairman. I appreciate you holding this hearing on 
the Globalization of R&D and Innovation. This issue will affect our 
county and economy for years to come. Indeed this may be one of the 
most important hearings we have all year.
    I am looking forward to hearing the statements from all of the 
witnesses, each of whom is considered an expert in this field. I know 
this will be an educational, informative debate.
    I think what we will hear today dovetails with some of the 
testimony heard from the authors of the ``Rising Above the Gathering 
Storm'' report.
    Many people have argued that we really know very little about the 
types of jobs that are being offshored. Once upon a time it was thought 
that only low-skilled jobs were in danger of being offshored. However, 
it seems that highly educated people in good paying jobs are now just 
as threatened by the phenomena of offshoring.
    Last year China graduated 219,600 engineers, representing 39 
percent of all the Bachelor's degrees in that country. The U.S., on the 
other hand, graduated 59,500 engineers, or five percent of all 
Bachelor's degrees. Furthermore, 58 percent of all degrees awarded last 
year in China were in physical sciences and engineering, compared to 17 
percent in the United States--a figure that is dropping by about one 
percent a year.
    Moreover, of the U.S. science and technology workforce, 38 percent 
of the Ph.D.s were foreign born in 2000.
    In this global economy our children will be competing head-to-head 
with Chinese and Indian students, but they aren't taking the necessary 
classes or making their education work for them. When our children 
graduate from high school they have taken consistently fewer classes in 
math and science than their contemporaries across the globe.
    And yet, how much do we really know about offshoring?
    Many have argued that we haven't adequately measured the effects of 
offshoring on our workers or our economy. Our government needs to do a 
better job developing metrics that give us the information we need to 
make informed decisions about trade and the economy.
    Many jobs and many plants have been offshored over the past several 
years--we all know examples from our home states. But I think what is 
even more concerning is the amount of R&D that is being permanently 
offshored and will not be coming back to the U.S.
    As the authors of ``Rising Above the Gathering Storm,'' write:

         It is easy to be complacent about U.S. competitiveness and 
        pre-eminence in science and technology. We have led the world 
        for decades, and we continue to do so in many fields. But the 
        world is changing rapidly, and our advantages are no longer 
        unique.

    If we continue to lose our R&D and high tech work to foreign 
competitors, we will have a very steep hill to climb to keep our 
economy growing.
    Mr. Chairman, I really applaud you holding this hearing to 
highlight the issue of globalization and offshoring. I look forward to 
working with you in the subsequent hearings on this important topic.

    Chairman Gordon. Thank you, Mr. Hall. We will hear more 
about that University of Texas report today, too.
    If there are additional Members who would wish to submit 
opening statements, your statements will be made a part of the 
record.
    [The prepared statement of Mr. Carnahan follows:]
           Prepared Statement of Representative Russ Carnahan
    Mr. Chairman, thank you for hosting this hearing to examine the 
implications of offshoring technological innovation on the U.S. 
workforce, STEM education, American competitiveness, and economic 
growth.
    As American science and engineering jobs become increasingly 
vulnerable to offshoring, the predicted impact of such relocation is a 
matter of contention. Numerous analysts over the past few years have 
concluded that 30 to 40 percent of U.S. jobs may be susceptible to 
overseas outsourcing, threatening tens of millions of jobs. China, 
India, and other developing countries are actively seeking to attract 
high-skill high-technology jobs through government policies, 
threatening America's comparative advantage.
    Today's hearing focuses on the expected effects of technology 
offshoring on the U.S. economy, as well as possible resource re-
allocation to maximize educational curricula and retain innovation 
work. I am eager to hear our witnesses' assessments of offshoring's 
economic implications so that we can reflect on the successes and 
inefficiencies of our policies and programs, and seek to make 
modifications for improvement. Your first-hand experiences are vital to 
maintaining U.S. competitiveness.
    To all the witnesses--thank you for taking time out of your busy 
schedules to appear before us today. I look forward to hearing your 
testimony.

    Chairman Gordon. We are very lucky to have this very 
distinguished panel of witnesses before us today to launch the 
first in a series of hearings addressing the topic of 
offshoring. Dr. Alan Blinder is Professor of Economics at 
Princeton and former Vice Chair of the Board of Governors of 
the Federal Reserve System. Dr. Ralph Gomory is President of 
the Alfred P. Sloan Foundation and was head of IBM Research for 
16 years. Dr. Martin Baily is senior fellow at the Peterson 
Institute of International Economics and senior advisor to 
Mackenzie Global Institute. And Dr. Thomas Duesterberg is the 
President of the Manufacturing Alliance and former Assistant 
Secretary of International Economic Policy at the Commerce 
Department. You are a very distinguished group, and as Mr. Hall 
said, it is unusual that we are expanding our time but we want 
to hear from you.
    Let me give the Members and our witnesses a little update. 
It is expected that we are going to have votes at 2:00, which 
means at about 2:10 we are going to dash out of here, and 
unfortunately, it is going to be a series of votes and a 
photograph, and so, if we can, I think that we need to do our--
in full respect to you coming here, but I think we will be 
better off to try to accomplish this before then, if we can, so 
that we don't have to let our panel continue to wait.
    And with that, I will be quiet and call on Dr. Blinder.

STATEMENT OF DR. ALAN S. BLINDER, DIRECTOR, CENTER FOR ECONOMIC 
  POLICY STUDIES; GORDON S. RENTSCHLER MEMORIAL PROFESSOR OF 
                ECONOMICS, PRINCETON UNIVERSITY

    Dr. Blinder. Thank you, Mr. Chairman, Members of the 
Committee, and thanks for the opportunity to take part in this 
hearing. I was asked to talk about the offshoring of American 
jobs in general, and with specific attention to science and 
technology issues; and I want to start with some general 
observations and then get to some specifics.
    To start with, Americans don't have any biological 
superiority to workers in developing countries and yet we earn 
much higher wages. So why is that? Well, one factor is that we 
are, on average, much better educated. But the average is not 
the only relevant thing. Millions of skilled workers in 
developing countries are educated about as well and, in some 
cases, better than Americans are, and importantly, those 
numbers are bound to increase as poor countries continue to 
participate more vigorously and effectively in the world 
economy.
    Apart from better education and skills, the other main 
reason why U.S. workers earn so much more than workers in, say, 
India or China, is that Americans work with much better 
technology and with much better physical capital, again on 
average. But physical capital, financial capital, and 
technology are all increasingly mobile these days. So, in 
particular, the capital and the technology can move to where 
the cheap labor is, and we see that this is happening.
    This is all very old hat. It describes a situation that has 
been familiar to U.S. manufacturing workers and businesses for 
decades as millions of manufacturing jobs have been offshored 
from the United States and also other rich countries--this is 
not an American story to an ever-changing list of poorer 
countries which, if you go way back, included Japan, which is 
not a poor country anymore, but these days, of course, is 
headed by China.
    The new wrinkle today is in services, where a similar 
process is unfolding, or I really should say just beginning to 
unfold. Advances in electronic communications have decreased 
and, in some cases obliterated, the advantages of physical 
proximity in a wide variety of service jobs simply because the 
work can be performed anywhere and delivered by telephone or by 
Internet or by some other method.
    While still in its infancy, electronic offshoring has 
already begun to move well beyond traditional low-end jobs like 
call center operators to highly skilled jobs such as computer 
programming, engineering, and security analysis, just to name a 
few. I think there is little doubt that both the range and the 
number of jobs that will be able to be delivered electronically 
is going to increase greatly as the technology improves and as 
countries like India, China, and others educate more and more 
skilled workers. In the case of India in particular, these are 
going to be English-speaking workers, which is quite germane.
    So what is novel about service offshoring? At the basic 
conceptual level, the pure economics, nothing much. The same 
basic market forces that govern trade in goods also govern 
trade in services. The novelty, to my mind, comes at the 
practical level. Specifically, I have in mind three things. 
First, there are many, many more service jobs than 
manufacturing jobs in all the rich countries. In the United 
States, the ratio is about five to one, five times as many 
service jobs as manufacturing and construction jobs. Second, 
unlike factory workers, the people who hold these jobs are not 
accustomed to competing with low-cost foreign labor, and you 
can be sure that they are not going to like it any more than 
the manufacturing workers did when this phenomenon hit 
manufacturing. And third, many of the white-collar 
professionals who will feel threatened by offshoring, if they 
don't already, are vocal and politically engaged.
    You can all judge for yourselves better than I can, but 
this strikes me as a potentially potent political brew.
    With that said, I want to turn to some specifics. First, 
which service jobs are the most vulnerable to offshoring? It 
would be nice to say that only low-skilled jobs are vulnerable 
while high-skilled jobs will remain in America. And as Mr. Hall 
said, we may have believed that once, but it doesn't appear to 
be the case. My research finds hardly any correlation at all 
between either the educational attainment of an occupation or 
its average wages on the one hand and the degree of 
offshorability of the occupation.
    So what is the critical factor that determines which jobs 
can easily be offshored and which cannot? I argue that it is a 
little discussed and often unnoticed job characteristic: the 
importance of face-to-face contact. I mean by that face-to-face 
contact with people outside the work unit, not with your fellow 
workers. For lack of a pre-existing vocabulary, I have called 
the jobs in which face-to-face contact is vital to performing 
the service personal services and the occupations in which it 
is not impersonal services.
    So, for example, services that can be delivered by 
telephone or Internet, like call centers and financial 
analysis, are by this DEFINITION impersonal, and that means 
they are potentially tradable across national borders just like 
manufactured goods. But services that have to be delivered 
physically, or face-to-face, like driving a cab or brain 
surgery or serving in Congress, I might add, or services whose 
quality deteriorates markedly when they are delivered 
electronically--such as, say, high school teaching or 
psychoanalysis--those are personal services. They are not going 
to be traded internationally, at least probably not.
    My central claims about this phenomenon are two. The first 
is that market pressures emanating from trade and globalization 
will force, and I want to underscore the verb force, more and 
more Americans to leave impersonal service and manufacturing 
jobs and to seek employment in personal service jobs instead. 
And second, that we will be better off as a nation if 
government, businesses and the schools approach the coming 
occupational migration--and that is what it is, a large-scale 
occupational migration--deliberately, thoughtfully, and with 
appropriate policy responses rather than letting it take us by 
surprise.
    Now, in voicing those views, I seem to have created a bit 
of a media stir, as some of you may know. So I would like first 
to quickly avoid three confusions that are often made.
    Some people have misinterpreted my estimate of 30 to 40 
million U.S. jobs as potentially offshorable to mean that all 
those jobs will be lost. They won't be. We haven't lost all 
manufacturing jobs, and they are all offshorable. We will not 
lose all of these impersonal service jobs.
    Second, some have interpreted my writings as being hostile 
to trade. That is just not true. I have always been an advocate 
of open trade, and I still am. Protectionism is a loser's game. 
It's not a game that America should be playing.
    Third, some people have misinterpreted my writings as 
hostile toward India in particular. I mentioned the relevance 
of India. That is not true. On the contrary, I applaud India. I 
think they are doing exactly the right thing for their people: 
exploiting the comparative advantage they have in English, 
building up service offshoring industries, and not 
incidentally, in the process contributing vitally to the 
reduction of world poverty. This is all terrific.
    On the other hand, the one criticism of my work to which I 
do plead guilty, but I want to explain, the guilt is 
emphasizing the downsides of service offshoring rather than the 
upsides. There are both. I do that for a very simple reason: 
because I think that Americans in general and especially 
American policy-makers need to focus on and think about 
ameliorating the downsides of offshoring, both for basic 
fairness reasons and if we are to preserve the open trading 
system against the forces of protection. The people who win 
from offshoring won't object to it one little bit, and the 
markets will produce the upsides without the government lifting 
a finger. But offshoring, and trade more generally, don't look 
so attractive to the people that lose their jobs in the 
process. And that is where the government needs to help.
    Having just ruled out the ``Stop the world, I want to get 
off'' approach, the question is what Congress can do to make 
this transition a bit easier. I actually see three large policy 
agendas, and given the time, I am just going to be able to tick 
them off, basically. Maybe we can come back if there is a 
question period.
    First, there is a safety net agenda. Put very simply, the 
U.S. Government now offers disgracefully little help to workers 
who are displaced from their jobs, whether that is because of 
trade or for any other reasons. Without going into great 
detail, I am talking about stingy unemployment insurance, very 
weak trade adjustment assistance, the prospect of losing your 
health insurance and your pension rights, and so on, and also, 
by the way, very scant opportunities for retraining. I can't 
believe that our country can't do better than that, and I know 
other countries do better than that.
    Second, there is an educational agenda. I would like to put 
it this way. We built our educational system in the 19th 
century to produce legions of factory workers for the first 
Industrial Revolution. It was a great success, but that success 
is over, and we haven't really adapted yet to the second 
Industrial Revolution, which is the shift to services. Having 
not done that, we now have to adapt to what I think might be a 
third Industrial Revolution, which is the shift away from 
impersonal services to the personal service jobs that will 
remain in America. And virtually nobody in this country is 
thinking about how to do this right now.
    Third, and closest to the hearts of this committee, I 
believe, is the innovation agenda, and I would just like to 
give an illustrative example of why this is important. If you 
think about the television manufacturing industry, not 
television shows but TV set manufacturing, it began here; and 
once upon a time, lots of Americans had good jobs making 
televisions, but then, as this became a commodity, it migrated 
offshore, and as I am sure you all know, the number of TV sets 
made in America is zero and has been for years. As a result of 
that, television manufacturing often held up as an example of 
industrial failure--because we started it and then we lost it. 
I think it is important that we think of that as an example of 
industrial success instead. The leader, and that is our role, 
must constantly innovate and move on like the cowboy in the 
Westerns, and that is just what we did in this case. We got 
there first, then we left as the industry migrated aboard. Both 
parts of that process are very important: getting there first 
and then letting go when it is time to let go. Fifty-two 
seconds?
    Mr. Blinder. I am sorry.
    Chairman Gordon. Yeah, go ahead and conclude.
    Mr. Blinder. I just want to conclude with what does that 
mean? It means that we have to remain the hotbed of business 
creativity and innovation in the United States. So that goes to 
support for basic research, for industrial R&D, for creative 
business management, for the entrepreneurial culture that we 
are so good at, for open and vibrant but honest capital 
markets. These are the things I think that we need to think 
about in order to move forward and maintain the leadership 
position that America has had for so long.
    Thank you all for listening.
    [The prepared statement of Dr. Blinder follows:]
                 Prepared Statement of Alan S. Blinder
    Mr. Chairman, Members of the Committee, thank you for the 
opportunity to take part in this hearing. I was invited here to talk 
about the offshoring of American jobs in general, with special 
attention to science and technology issues. I'd like to start with some 
general observations about offshoring, and then go on to some 
specifics.
    Looking across the world, if you hold occupation and education 
constant, Americans earn much higher wages than workers in developing 
countries. But we Americans have no biological or neurological 
superiority to these foreign workers. It is true that we are far better 
educated on average. However, millions of skilled workers in developing 
countries are educated about as well as Americans are. And those 
numbers are bound to increase as poor countries, notably China and 
India, continue to participate more vigorously and effectively in the 
world economy.
    Apart from better skills and more education, the other main reasons 
why U.S. workers earn so much more than workers in, say, India or China 
is that Americans work with much better technology and with much more 
physical capital. But in an increasingly globalized economy, physical 
capital, financial capital, and technology are all increasingly mobile. 
So, in particular, the capital and technology can move to where the 
cheap labor is, thereby raising labor productivity (and wages) there.
    All this is old hat, and none of it is controversial. It describes 
a situation that has been familiar to U.S. manufacturing workers for 
decades. One consequence of these forces has been the offshoring of 
millions of manufacturing jobs from the United States (and other rich 
countries) to an ever-changing list of poorer countries--a list that 
once included Japan, but is now headed by China.
    Today's new wrinkle is in services, where a similar process is 
unfolding. Advances in electronic communications have decreased or 
obliterated the advantages of physical proximity in a wide variety of 
service jobs, where the work can now be performed abroad and the work 
products delivered to the U.S. by telephone or computer networks. 
Notice that ``shipping'' electrons is a lot easier and cheaper than 
shipping physical goods.
    While still in its infancy, electronic offshoring has already begun 
to move well beyond traditional low-end jobs, such as call center 
operators, to highly-skilled jobs such as computer programmers, 
scientists and engineers, accountants, security analysts, and some 
aspects of legal work--to name just a few. And I think there is little 
doubt that the range and number of jobs that can be delivered 
electronically is destined to increase greatly as technology improves 
and as India, China, and other nations educate more and more skilled 
workers--in the case of India, English-speaking workers.
    What's novel about service offshoring? At the conceptual level, 
nothing much. The same basic market forces that govern trade in goods 
also govern trade in services. The novelty comes at the practical 
level. Specifically, I have in mind three distinguishing features:

          First, in the U.S. and other rich countries, there 
        are many more service jobs than manufacturing jobs. In the 
        U.S., there are about five times as many.

          Second, unlike factory workers, the people who hold 
        these jobs are not accustomed to competing with low-cost 
        foreign labor. They will not welcome this new competition any 
        more than manufacturing workers did.

          Third, many of the professionals who are seeing, or 
        will see, their jobs become offshorable are vocal and 
        politically engaged.

    You can judge for yourselves, but this trio strikes me as a 
politically potent brew. Members of Congress will hear from many actual 
and prospective job losers, clamoring for protection.
    Now let me move to specifics. First, which service jobs are the 
most vulnerable to offshoring? It would be nice to say that only low-
skilled jobs are vulnerable while the high-skilled jobs will remain in 
America. We may have once believed that, but it does not appear to be 
so. I have estimated that there is very little correlation between the 
educational attainment of an occupation and its susceptibility to 
offshoring.\1\ It would be similarly reassuring if low-wage jobs were 
more vulnerable to offshoring than high-wage jobs. But that, too, 
appears to be untrue. According to my estimates, there is no 
correlation between an occupation's average wages and its degree of 
offshorability.
---------------------------------------------------------------------------
    \1\ This and the other estimates in this paper come from Alan S. 
Blinder, ``How Many U.S. Jobs Might Be Offshorable?,'' CEPS Working 
Paper No. 142, Princeton University, March 2007. (March 2007).
---------------------------------------------------------------------------
    What, then, is the critical factor that determines which jobs can 
easily be offshored and which cannot? I have argued that it is a 
little-discussed, and often unnoticed, job characteristic: the 
importance of face-to-face contact with people outside the work unit 
(whether upstream suppliers or downstream customers). For lack of a 
pre-existing vocabulary, I have labeled the jobs in which face-to-face 
contact is important as personal services and the occupations in which 
face-to-face contact is unimportant as impersonal services.
    For example, services that come (or could come) to their end-users 
by, say, telephone or Internet (e.g., call centers, financial analysis) 
are impersonal. They are tradable across national borders, just as 
manufactured goods are. But services that must be delivered physically 
or face-to-face (e.g., driving a cab, brain surgery) or whose quality 
deteriorates markedly when they are delivered electronically (e.g., 
high school teaching, psychoanalysis) are personal and cannot be traded 
internationally. Serving in Congress is a personal service job. I leave 
it to you to decide whether giving Congressional testimony is a 
personal or an impersonal service.
    My central claims--which apparently are controversial--are two: 
first, that market pressures emanating from trade and globalization 
(especially international differences in labor costs) will force more 
and more Americans to leave impersonal service and manufacturing jobs 
and seek employment in personal service jobs instead. And second, that 
we will be better off as a nation if government, businesses, and the 
schools approach that occupational migration deliberately, 
thoughtfully, and with appropriate policy responses, rather than 
letting it take us by surprise.
    In voicing these views in recent months, I seem to have created 
something of a media stir. (You should see my fan mail!) So, before 
going further, I'd like to dispel some possible confusions.

          First, some people have misinterpreted my estimate 
        that 30-40 million U.S. jobs are potentially offshorable to 
        mean that all of those jobs will actually be lost. They won't 
        be, any more than globalization has eliminated all 
        manufacturing employment in the U.S. (It hasn't.) Besides we 
        will also be gaining jobs from globalization. Mass unemployment 
        is not in America's future.

          Second, some have misinterpreted my writings as 
        hostile to trade. Nothing could be further from the truth. I 
        remain an advocate of open trade, just as I have always been. 
        Protectionism is a loser's game, and I believe our country 
        stands to be a big winner from globalization--eventually. 
        Besides, how do you stop electrons at the border?

          Third, some have misinterpreted my writings as 
        hostile toward India, where many of the offshored service jobs 
        are going. I am not. In fact, I applaud India for doing exactly 
        the right thing for its people--exploiting its comparative 
        advantage in English, building up its service offshoring 
        industries, and in the process, contributing to the reduction 
        of world poverty.

    There is, however, one legitimate criticism of my writings on this 
subject:

          Some people have accused me of overemphasizing the 
        downsides of service offshoring--such as job losses and 
        downward pressures on wages--and under-emphasizing the 
        upsides--such as job gains and cost reductions.

    There is truth to this criticism, but I have a reason. I believe 
that American policy-makers must focus on and ameliorate the downsides 
of offshoring--both for basic fairness reasons and to preserve the open 
trading system. The winners from offshoring will not object to its 
upsides, which markets will produce quite handily without any 
government assistance (other than avoiding protectionism). But 
offshoring, and trade more generally, will not look so good to the 
people who lose their jobs. That's where the government needs to help.
    Having just ruled out the ``Stop the world, I want to get off'' 
approach, what can Congress do to make the transition to large-scale 
service offshoring more palatable and less painful? While I realize 
that many of the appropriate policy responses fall outside the purview 
of this committee, I see three large policy agendas, each of which 
encompasses many specific policy initiatives.
    First comes the safety net agenda. Simply put, the U.S. Government 
now offers disgracefully little help to workers who are displaced from 
their jobs--whether by trade or for other reasons. Without delving into 
the details, I am referring here to such problem areas as stingy 
unemployment insurance, weak trade adjustment assistance, loss of 
health insurance, pension rights that are often not portable, and scant 
opportunities for retraining--to name just a few. I can't believe that 
my country can't do better. We know that other rich countries do.
    Second, there is an education agenda. Put starkly, our K-12 
education system was designed in the 19th century to produce cadres of 
factory workers for the First Industrial Revolution. It succeeded 
mightily, but it has barely adapted to the Second Industrial 
Revolution: the shift from manufacturing to services. Having failed to 
do that, it now needs to gear up for a possible Third Industrial 
Revolution: the offshoring of impersonal service jobs. I believe we 
need to educate more young people for the personal service jobs that 
will account for a rising share of U.S. employment. But hardly anyone 
in the education business is now thinking about how to do this. And, by 
the way, similar changes are called for in the community colleges and 
perhaps even in the four-year colleges.
    Third, there is the innovation agenda. Since this one is closest to 
the concerns of this committee, I will deal with it at greater length--
starting with an illustrative example.
    The television manufacturing industry began here and, decades ago, 
provided good jobs for many American factory workers. But as TV sets 
became ``just a commodity,'' their production moved offshore to 
locations with much lower wages. And for years now, the number of 
television sets manufactured in the United States has been zero. In 
consequence, TV manufacture is often held up as an example of 
industrial failure: We started the industry, then lost it. Actually it 
should be viewed as a success story. The world's industrial leader--the 
United States--must constantly innovate and move on, like the cowboy 
hero in the Western movies. In the case of TV sets, we got there first, 
but then left. Both were appropriate.
    This example illustrates an important point: It is crucial for the 
United States to remain the incubator of new business ideas and the 
first mover when it comes to providing new goods and services. If we 
are to remain big exporters as the rest of the world advances, we must 
specialize in the sunrise industries, not the sunset ones. We must do 
this not because we like the job destruction in the old industries that 
we lose, but because we want and need the job creation in the new 
industries that we gain, even if those jobs won't stay here forever.
    Trying to name concrete examples of future industrial winners is a 
fool's errand, and I won't go there. Who could have told President 
Jefferson in 1802 where the new jobs would come as the share of 
Americans earning their living on farms collapsed from 84 percent to 
two percent? Moving up in time, who could have told President 
Eisenhower in 1953 where the new jobs would come from as the share of 
Americans earning their living in manufacturing dwindled from 32 
percent to 10 percent? But both industrial transitions happened, and 
Americans found plenty of work to do.
    While I'm not foolish enough to try to name the new industrial 
winners, we all know that many new goods and services will be invented 
and/or commercialized in the coming decades. As the world's leading 
nation, the United States must grab the first-mover advantage in a 
disproportionate share of these. And that, in turn, requires that we 
remain a hotbed of business creativity and innovation. To accomplish 
this, basic research, industrial R&D, creative and aggressive business 
management, an entrepreneurial culture, an active venture capital 
industry, and the like must all remain integral parts of the American 
success story. But that does not seem too tall an order. It is, after 
all, how we got here in the first place.
    Most of the necessary changes will be accomplished by the private 
sector, which has proven its flexibility and adaptability time and time 
again. Nonetheless, there are a number of vital roles for the Federal 
Government in such areas as fostering basic science and R&D, supporting 
scientific and engineering education, returning both the tax code and 
the budget to sanity, maintaining competition and open trade, and 
keeping the capital markets vibrant but honest. (This list is not 
exhaustive.) Several of these areas fall under the purview of this 
particular Committee. And all of them fall under the purview of the 
U.S. Congress. There is much to do, and the time to start is now.
    Thank you for listening.

                     Biography for Alan S. Blinder
    ALAN S. BLINDER is the Gordon S. Rentschler Memorial Professor of 
Economics at Princeton University and Co-Director of Princeton's Center 
for Economic Policy Studies, which he founded in 1990. He is also Vice 
Chairman of the Promontory Interfinancial Network, and Vice Chairman of 
the G7 Group.
    Dr. Blinder served as Vice Chairman of the Board of Governors of 
the Federal Reserve System from June 1994 until January 1996. In this 
position, he represented the Fed at various international meetings, and 
was a member of the Board's committees on Bank Supervision and 
Regulation, Consumer and Community Affairs, and Derivative Instruments. 
He also chaired the Board in the Chairman's absence. He speaks 
frequently to financial audiences.
    Before becoming a member of the Board, Dr. Blinder served as a 
Member of President Clinton's original Council of Economic Advisers 
from January 1993 until June 1994. There he was in charge of the 
Administration's macroeconomic forecasting and also worked intensively 
on budget, international trade, and health care issues. During the 2000 
and 2004 presidential campaigns, he was an economic adviser to Al Gore 
and John Kerry. He also served briefly as Deputy Assistant Director of 
the Congressional Budget Office when that agency started in 1975, and 
testifies frequently before Congress on a wide variety of public policy 
issues.
    Dr. Blinder was born on October 14, 1945, in Brooklyn, New York. He 
earned his A.B. at Princeton University in 1967, M.Sc. at London School 
of Economics in 1968, and Ph.D. at Massachusetts Institute of 
Technology in 1971--all in economics. Dr. Blinder has taught at 
Princeton since 1971, and chaired the Department of Economics from 1988 
to 1990.
    Dr. Blinder is the author or co-author of 17 books, including the 
textbook Economics: Principles and Policy (with William J. Baumol), now 
in its 10th edition, from which over two million college students have 
learned introductory economics. He has also written scores of scholarly 
articles on such topics as fiscal policy, monetary policy, and the 
distribution of income. From 1985 until joining the Clinton 
Administration, Dr. Blinder wrote a lively monthly column in Business 
Week magazine. Currently, he is a regular commentator on PBS's Nightly 
Business Report and appears frequently on CNBC, CNN, Bloomberg TV, and 
elsewhere.
    Dr. Blinder is the immediate past President of the Eastern Economic 
Association and was previously Vice President of the American Economic 
Association. He is a member of the Bretton Woods Committee, the 
Bellagio Group, and the Council on Foreign Relations, and a former 
governor of the American Stock Exchange. Dr. Blinder also serves on the 
academic advisory panels of the Federal Reserve Bank of New York, the 
FDIC Center for Financial Research, and the Hamilton Project.
    He has been elected to the American Philosophical Society and the 
American Academy of Arts and Sciences.
    Dr. Blinder and his wife, Madeline, live in Princeton, NJ. They 
have two sons, Scott and William, and two grandsons, Malcolm and Levi.

    Chairman Gordon. Thank you, Dr. Blinder.
    Let me also remind everybody that this is being televised, 
so all the folks, while different committees and things are 
going on, our staff, as well as Members, are watching from here 
so more are gaining this information than just the ones here 
directly.
    So Dr. Ralph Gomory, please--oh, it is Dr. Baily? All 
right. We will go--then Dr. Baily.

   STATEMENT OF DR. MARTIN N. BAILY, SENIOR FELLOW, PETER G. 
 PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS, WASHINGTON, DC

    Dr. Baily. I will start. Thank you, Mr. Chairman, and thank 
you to the Committee for giving me this opportunity to talk. 
Like Alan, I was a member of the Clinton Administration and I 
support virtually all the policies that he described. I am very 
much in tune with that part of what he said, and I suspect I 
will probably agree with many of the policies that Dr. Gomory 
proposes. On the other hand, the tone that I want to use is a 
bit more favorable towards globalization and its benefits to 
the United States than Alan--the remarks Alan made, and I 
suspect the ones that Dr. Gomory is going to make, based on his 
opinions that I have heard before. Alan mentioned that the 
benefits of globalization are going to come anyway. In other 
words, you don't have to advocate those; you are going to get 
them and it is important to point to some of the costs that do 
need to be ameliorated by actions in the policy environment.
    Well, to some extent I agree with that, but globalization 
is getting such a bad rap at the moment that I want to try to 
level that intellectual playing field a little bit because it 
has brought tremendous benefits to the United States. It has 
made the United States much more competitive, more productive. 
We have had access to better technology. We have access to 
capital, and by the way, I would mention that one of the 
comments that Alan made, other people make it as well: U.S. 
capital is going to flow overseas. The fact of the matter is, 
about 80 percent of the available capital in the global economy 
is actually coming to the United States, only 15 percent to 
other countries, so we are benefiting from a tremendous inflow. 
There are costs to that inflow also.
    The problem is, a couple of things. One is that we have 
gotten our exchange rate out of whack, and that is one reason 
that globalization has got a bad name because it has made it 
very hard for manufacturers, and now service industries, to 
compete. We have a natural comparative advantage in service 
industries, which you can see even today in the trade surplus 
that we have in services. So, we are actually inshoring service 
sector jobs to the United States and have been for many years. 
But we are facing an uphill struggle there because of the 
exchange rate, and that has certainly been true of 
manufacturing where we have got a huge deficit and have had for 
a long time. The other problem, and I agree with the one that 
Alan mentioned, is that we do very little to help with training 
workers, with adjustments of workers. I am actually just back 
from a trip to Europe, and I met with a number of leaders in 
Brussels, including those form Denmark, that developed a so-
called flex security system there, which gives their workforce 
a great deal of flexibility, but it also gives it a great deal 
of security that you get trained, you get pushed towards 
another job. It is a very tough-minded system. You can't just 
stay on benefits for forever. You have to go get another job. 
You are required to do that. But at the same time, you are not 
left out there on your own. I think the United States is very 
good at the flexibility side. It has not been so good at the 
security part. Europe is very good at the security and has not 
been very good at flexibility. And both have to be there. I 
don't think we could transmit the Danish system, as it is, to 
the United States, but there are some important lessons to be 
learned there.
    Let me turn now more on the science and technology side, 
and I am going to mention more on the benefits, and then, I 
will deal with what I see as some of the challenges or 
problems. The United States actually has benefited 
substantially from an inward brain drain. The OECD in a report 
published in February of this year notes that nearly 26 percent 
of the doctorates in the United States are foreign born. Of 
these, 54 percent have become naturalized U.S. citizens. I am 
one of them, I might note. Most of these come from Asia and 
Europe and many of them actually received their doctorates with 
foreign educations. So we are actually, even though we are the 
richest country or the richest large country in the world, we 
are actually benefiting from the education that is being 
provided to people overseas. There are actually very few U.S. 
citizens that go overseas, and the people that come to the 
United States cite the economic opportunities here and the 
tremendous infrastructure that we have here, the scientific and 
technological community that really leads the--continues to 
lead the world.
    Okay. Let me talk on the challenges side. A lot of the 
concerns about offshoring are around the computer and high-tech 
industry and programming industry, and I understand why. There 
are huge numbers of jobs being created in R&D centers and 
programming centers overseas including China and India. This is 
an industry that has, for a number of years, been very 
globalized. It really is. The production, the manufacturing, a 
lot of that is done overseas. A lot of the companies are 
American but that has been--you know, that industry has been 
sliced and diced and put overseas. One thing I would say though 
to qualify that, and that is in Table 1 in my testimony 
developed by one of my colleagues at the Institute, and it 
shows that even in the computer and high-tech fields, 
employment is growing in the United States in the higher level 
areas. It has gone down in a lot of basic programming areas and 
some of the call center stuff. Those kinds of jobs have gone 
overseas and they are not--I wouldn't want to minimize the cost 
of that, but a lot of those high-tech jobs are still growing in 
the United States even though the high-tech sector itself has 
seen a substantial kind of downturn since 1999, the period that 
I start with.
    I also want to say that the United States benefits from 
low-cost hardware that is produced around the world, and we 
benefit from the software that is made around the world. As 
software is developed in India and China and used here in the 
United States, we gain the benefits of that for the 
productivity of our companies.
    On the policy side--I see I am racing through my time 
before I got halfway through my comments here. On the policy 
side here, at some level we have to embrace the fact that 
science and technology is a global endeavor. It really is. I 
don't think we can shut it off in any way. That means we have 
to allow foreign-born scientists and engineers to come to the 
United States, and I have talked to some of them. They get 
pretty lousy treatment when they apply these days. So there are 
scientists and technologists that want to come to the United 
States, want to become Americans, want to create American jobs, 
and they get treated guilty before they have--and have to prove 
their innocence. So, I think that is something that needs to be 
done there. Obviously we have to protect the United States. We 
can't have another 9/11. I understand that concern, but I don't 
think it is necessary for us to treat those people badly.
    Second point is, we certainly have to fund scientific 
research, and we are funding scientific research. I know this 
Committee is in favor of that, so I am preaching to the choir 
here. But obviously, in a time of budget tightness, we really 
do need to make sure that we keep up our scientific community. 
We put a lot of money on medical research, and that is fine. We 
just need to make sure that things like material science and 
the whole scientific endeavor gets adequate funding.
    And then, as Alan said, on education support, India has 
done a good job of training its college gradates, its computer 
programmers. I would note that the Indian education system, as 
a whole, is pretty awful. They have huge rates of illiteracy. 
So I don't think we would look to the Indian system as a good 
system, but one part of it that is good that really has been 
the push of their education system is at the higher end, and 
they have done a good job of creating programmers and people 
with mathematics and science skills, and here in the U.S. we 
need to do a better job in that dimension. Now, a lot of 
Americans don't want to study those things. They don't want to 
take mathematics and science, and so what we can we do there? 
Well, I think there is a certain amount that can be done with 
funding on that area. If we provide scholarships, I think more 
people will go to graduate school in science and technology.
    And finally, the other part of embracing the global nature 
of this is that, both as businesses and as a society, we need 
to be open to the innovation that is made around the world. 
Somebody has called that rather inelegantly blowback 
innovation. That is an unfortunate name, but it means that a 
lot of stuff that is going on around the world can come back 
and make the United States more productive.
    Let me say a word about offshoring. I was involved in a 
study that looked at offshoring. We did a lot of interviews of 
companies. We went and looked at those people with their 
educational qualifications, all the engineers coming out of 
China, how many of them really have serious engineering 
qualifications, how many of them can speak English, would 
actually substitute for American workers, how many people are 
involved in face-to-face stuff like that. We came up with a 
more conservative number than Alan did. Now, part of this is 
the time horizon, but I don't think that is the ultimate 
question because we concluded that only 11 percent of jobs 
could ultimately be offshored, not the number that Alan has. 
The number that will be offshored over the next few years is 
certainly smaller, as Alan agreed.
    Let me conclude by saying that I think the United States 
has been, and still is, a great place for science and 
technology and innovation. It has been one of our huge 
strengths. So the issue should be to let us build on this 
strength. Let us not be too scared of what is happening around 
the world. Let us build on the strength we have and make sure 
we remain in that position.
    Thank you.
    [The prepared statement of Dr. Baily follows:]
                Prepared Statement of Martin N. Baily\1\
---------------------------------------------------------------------------
    \1\ The author is a Senior Fellow at the Peterson Institute for 
International Economics in Washington DC. He was previously the 
Chairman of the Council of Economic Advisers and a member of President 
Clinton's cabinet (August 1999 to January 2001). He has also served as 
a Member of the Council. The views expressed here are those of the 
author and should not be ascribed to the trustees, or other staff 
members of the Peterson Institute.
---------------------------------------------------------------------------
    Globalization has provided many benefits to the U.S. economy. My 
Peterson Institute colleagues, Gary Hufbauer et al., have estimated 
that the U.S. is a trillion dollars richer today than it would have 
been if there had been no reduction in trade barriers after the end of 
World War II.\2\ Many studies of productivity carried out at the 
McKinsey Global Institute have shown that productivity in an industry 
is enhanced when it is exposed to global competition, particularly 
competition against the world's leaders.\3\ You have to compete against 
the best if you want to be the best. The Organization for Economic 
Cooperation and Development found that openness to international trade 
had provided an important stimulus to growth among the member countries 
of that organization.\4\
---------------------------------------------------------------------------
    \2\ Scott Bradford, Gary Clyde Hufbauer, and Paul Grieco ``The 
Payoff to America from Global Integration,'' in C. Fred Bergsten ed., 
Foreign Economic Policy for the Next Decade, Peterson Institute for 
International Economics, 2006.
    \3\ For a list of productivity studies see www.mckinsey.com/mgi
    \4\ OECD Economic Policy Reforms: Going for Growth 2007, Paris, 
2007.
---------------------------------------------------------------------------
    The United States benefits from globalization because it results in 
lower prices for U.S. consumers, provides greater access to new 
technologies and business practices from around the world, allows U.S. 
companies to take advantage of economies of scale, and because it 
forces companies to improve their own performance. One sign of the 
benefits of the open and competitive market in the U.S. is the fact 
that productivity growth has been strong for the past ten years. From 
1995 to 2006 output per hour in the non-farm business sector of the 
U.S. economy has been nearly 2.9 percent a year, much faster than the 
pace achieved for 20 years prior to 1995 and faster than most other 
advanced economies.
    At the same time, there are legitimate concerns about the impact of 
globalization on Americans. There is concern is over the impact of 
globalization on the skilled workforce and on the science and 
technology base of the U.S. economy--the topic of this hearing. 
Strength in science and technology has been a key part of the success 
of the United States over its history. In addition there is concern 
over the huge trade and current account deficits and the slow growth of 
wages and incomes for lower skilled workers.

Scientific Research has Always been a Global Endeavor

    The history of science tells us that major contributions have been 
made to scientific knowledge from countries and regions around the 
world. The United States came to the fore in scientific research during 
the 20th century, relying on its great universities and taking 
advantage of outstanding scientists and engineers that came to the U.S. 
from the rest of the world. Today, the U.S. remains unquestionably the 
global leader in science, judged by the size and quality of its 
research community and on the metric of Nobel prizes.
    U.S. leadership is not unchallenged, however. Other countries are 
determined to build up their own scientific research and are funding 
research projects. What are the lessons for U.S. policy?

          Scientific research is not a zero-sum game. 
        Scientific breakthroughs made around the world have benefited 
        Americans and will do so in the future. One of the strengths of 
        the U.S. economy has been its ability to learn from 
        developments made elsewhere and adapt them to the needs of the 
        economy.

          Maintaining U.S. strength in science depends heavily 
        on embracing its global character. This means that trained 
        scientists from around the world must be able to come to the 
        United States and participate in the research being carried out 
        here. It means that students from around the world must be 
        allowed to come to U.S. graduate schools and remain in this 
        country for post-doc work.

          It is not just a matter of the number of visas 
        granted. The treatment given to people applying to enter the 
        U.S. has sometimes been unpleasant in ways that do not 
        materially assist our national security. Ultimately this will 
        weaken our universities and our scientific base.

          Scientific research depends upon funding from the 
        government and foundations because no private company finds it 
        worthwhile to support large-scale research that does not 
        provide it with proprietary returns. The U.S. government does 
        support scientific research and must continue to do so, even 
        during periods of budget tightness. Moreover, the allocation of 
        funds must be on the basis of the underlying science and 
        technology. Allocating too large a share of scarce research 
        dollars to celebrity diseases or big spectacular projects 
        should be avoided.

          There is also a case for government support of pre-
        commercial technology development. This is research that is 
        closer to commercial application than pure scientific study, 
        but that is too broad and general for companies to do. There 
        are areas of material science, for example, that fall into this 
        category. This type of research must be carefully handled, 
        however. Sometimes such projects continue too long because it 
        is not easy to admit failure. Failure is part of research, but 
        that means that projects must be turned off as well as turned 
        on.

Off-shoring Services and Science and Technology

    Historically, the United States has been a preferred location for 
employment in science and technology and has a robust comparative 
advantage in services. In 2006 the U.S. ran a $72 billion surplus in 
services trade, despite the fact that goods trade was in a huge 
international deficit. As part of the $72 billion services surplus, the 
U.S. ran a surplus of $35 billion in royalties and licenses, much of 
that coming from technology, as well as movies and other media. These 
figures in fact greatly understate the global revenues generated by 
technology activity in the U.S. U.S.- and foreign-based multinational 
companies draw on the technological base they have developed through 
R&D and business development here in the U.S. and use it in operations 
throughout the world. The returns come back as net income to U.S. 
companies.
    The U.S. also runs a trade surplus in education reflecting the 
foreign students that are educated in U.S. institutions. The only major 
service categories in which the U.S. ran a deficit were insurance and 
transportation.
    The very large trade deficits in manufactured goods experienced by 
the U.S. have been the result largely of a value of the dollar that has 
made U.S. production too expensive relative to other countries and the 
dollar has also hurt U.S. services trade. The values of the Euro, the 
British pound, the Canadian dollar and other currencies have adjusted 
upwards and this has made the U.S. a more competitive economy for 
locating production facilities and also R&D and other technology 
facilities. This should help to boost U.S. employment in technology 
fields going forward. Some Asian currencies, notably the Chinese 
renminbi and the Japanese yen, remain undervalued, according to several 
of my Peterson Institute colleagues, and if these currencies adjust 
upwards in the future this will add to the desirability of the U.S. as 
a location for high technology research, as well as tradable services 
more broadly.
    On balance, the U.S. service sector as a whole has sustained its 
position as a net exporter through a challenging overall environment 
for trade. Many countries around the world have off-shored their R&D 
and technology employment to the U.S., pharmaceutical R&D by U.S. and 
European companies in New Jersey, for example.
    This is not to downplay the competitive challenges now facing the 
U.S. service sector and the pressure being felt by some mid-level 
occupational categories in the U.S. Table 1, prepared by the Peterson 
Institute's Jacob Kirkegaard, shows employment in a number of computer 
and technology related occupations, as well as employment in lower-
skilled service occupations that are subject to relocation off-shore. 
The upper half of the table reveals that call-center type occupations 
and low-wage technology workers have experienced a substantial decline 
in employment, about 800,000 between 1999 and May 2006. This decline is 
in part the result of off-shoring, moving these jobs to lower-cost 
locations. Not all the employment decline is trade-related, however. 
Some of the largest declines are for data entry keyers and word 
processors and typists. These occupations have been heavily affected by 
changes in the technology itself, making it easier to read and transfer 
data electronically and allowing many white-collar workers to enter 
their own documents or spreadsheets directly into the computer, 
bypassing the need for secretarial assistance.
    This is an important point. The book by Frank Levy and Richard 
Murnane points out that the characteristics that make it possible to 
off shore a particular job also make it possible to automate that 
job.\5\ This means that off shoring and automation are often 
alternatives. It is misleading to look at jobs that have ``moved'' to 
India and assume these jobs would have remained in the U.S. In many 
cases, the jobs would have been automated if there had not been the 
opportunity to buy the service overseas.
---------------------------------------------------------------------------
    \5\ Frank Levy and Richard J. Murnane, The New Division of Labor: 
How Computers are Creating the Next Job Market, 2005
---------------------------------------------------------------------------
    The lower part of the panel shows employment for mid-level workers 
and high-wage technology workers. The mid-level employment has risen 
nearly 52,000 and the high-wage workers have increased by about 428,000 
between 1999 and 2006. Despite the impact of the technology crash in 
2000-2001, and despite the impact of service sector off-shoring, 
employment in these job categories on average has increased 
substantially--by nearly 20 percent. Within the high-wage categories, 
however, there is one that stands out: computer programmers have seen a 
decline in employment of about 133,000. The decline in employment in 
this area comes because of the end of the tech boom, but also because 
many programming jobs have been re-located off-shore. The person who 
heard that programming was the way to ensure a good job and took some 
courses to learn the basics has found that the jobs are not there. 
Those that upgraded their programming and computer systems skills have 
been in demand.
    The Economics of Service Sector Off-Shoring\6\ One of the things 
that scare Americans is the idea that almost any job today could be 
off-shored. That is not true. A careful estimate has found that about 
11 percent of all jobs could theoretically be carried out in a remote 
location. There are higher estimates around, but these do not take into 
account adequately some of the difficulties of performing tasks 
remotely, including the difficulty of complex, one-on-one interactions 
that are required in many operations.\7\
---------------------------------------------------------------------------
    \6\ This section draws on The Emerging Global Labor Market, 2006, a 
study of the McKinsey Global Institute on which I was an advisor, see 
www.mckinsey.com/mgi
    \7\ Alan Blinder in ``Off-Shoring: The Next Industrial 
Revolution,'' Foreign Affairs, March-April 2006, makes a rough estimate 
that 28 to 42 million jobs are susceptible to off-shoring. Blinder does 
not mention the possibility of service jobs that come to the U.S. as a 
result of trade. J. Bradford Jensen and Lori Kletzer in ``Tradable 
Services: Understanding the Scope and Impact of Services Outsourcing,'' 
Peterson Institute, Working Paper 05-9, September 2005 use an original 
empirical approach and indicate a pretty large number of jobs that 
could theoretically be off-shored, although the authors believe only a 
fraction of this total are actually vulnerable.
---------------------------------------------------------------------------
    Even though 11 percent of employment is a lot smaller than some of 
the scare-numbers out there, it is still a very large number of jobs. 
Civilian employment in the U.S. was about 146 million in 2006, so 11 
percent would be over 16 million. But in fact the likely number of jobs 
that will be off shored over the next few years is much smaller than 
this. The main determinant of the number of jobs off shored is the 
extent to which U.S. businesses judge that it is economic to do so. For 
some sectors the cost advantage from moving off shore is very small and 
not worth the risks involved. This is becoming increasingly true for 
off shoring to India, where wages are rising very rapidly for skilled 
workers. For many sectors it is not possible to disaggregate their 
value chains and move parts of them overseas because the business 
processes are just not suitable. Many small businesses do not have the 
scale to make off shoring worthwhile. For some sectors there are issues 
of regulation or intellectual property protection that preclude off 
shoring. On balance, it can be expected that no more than four million 
jobs will be off shored over the next five years, or about 2.7 percent 
of civilian employment in the U.S. Figure 1 illustrates the different 
factors that influence the off-shoring decisions companies make.
    Overall, the growth of off-shoring is demand driven because there 
is an adequate supply of workers located in other countries that are 
qualified to perform the tasks that U.S. companies will look for. There 
are a couple of important qualifications on the supply side, however. 
One of the arguments often used to argue that U.S. jobs and wages are 
threatened is to claim that there are billions of new workers in the 
global labor market competing directly with American workers. This is 
not the case. After careful interviews with a number of companies, the 
McKinsey study found that the number of suitable workers available is 
much, much smaller. Based on educational qualifications alone there 
were about 33 million workers available in 2003, but after assessing 
their language skills and suitability and availability to work for 
multinational companies, the number dropped to about four million. The 
number of suitable workers is growing over time, of course, and so the 
overall supply will be more than adequate to meet the U.S. demand of 
around four million over the next five years, but talking about 
billions of competing workers is just misleading.
    The second qualification is that the number of suitable engineers, 
particularly software engineers, in the global economy may not be 
adequate to meet demand, leaving unmet engineering needs and/or rising 
relative wages for this group. Countries such as India and China are 
growing at an amazing pace and increasing their own demand for skilled 
workers. High tech in the U.S. is a rapidly growing sector again. If 
demand growth exceeds current estimates there will be a shortage of 
trained workers globally.
    Globalization and Technology: Evolving Models The nature of service 
sector off shoring is changing. Initially, companies took part of their 
value chain and sent it overseas--call centers or basic programming. 
What is happening now is that U.S. companies are forming partnerships 
with companies in India and elsewhere. The new models have the 
following characteristics:

          Cooperation--both parties work together to achieve 
        the goals of a common work force

          Productivity and innovation--drive for productivity 
        gains and the centralizing of key processing capabilities

          Transparency--sharing both financial and operating 
        details

          Movement between operating models--The client can 
        move processes (and staff) between the operating models to meet 
        changing business demands

          Third party vendors--May be deployed to perform 
        specialist services

          Multiple sites--Operations across multiple physical 
        centers and geographies

    As is to be expected, the opening up of service activities to 
globalization has triggered a new round of interactions. The overseas 
suppliers of services are developing skills that allow them to work 
with U.S. multinationals to increase productivity, the range of 
activities that can off shored and the different geographies that 
supply services. As off-shoring matures as an activity, it takes on new 
roles which focus on improving productivity and efficiency in U.S. 
operations, not just moving jobs. Note also that leading Indian off-
shoring companies are rapidly increasing their operations in the U.S. 
and Europe. Many of the outsourced services being provided to U.S. 
companies are being supplied by employees of outsourcing companies that 
are based in here in the U.S., creating American jobs.
    The Shifting Mix of Jobs The U.S. economy has sustained low rates 
of unemployment for the last twenty years and currently has an 
unemployment rate of 4.5 percent, so our economy can create jobs, 
indeed many companies report they have trouble recruiting workers. The 
challenge for the U.S. labor market is that the distribution of wages 
has become much wider over time. How serious this problem is and the 
extent to which it is the result of trade or technology is a matter of 
controversy that I will not address here, but there is no question that 
the off-shoring process has resulted in a shift in the composition of 
employment. As we saw in Table 1, in computer and other occupations 
that have been subject to off-shore competition, there has been a 
decline in basic jobs and an increase in higher skill jobs, on balance. 
Although off-shoring is not large enough to be a main driver of the 
distribution of income in the U.S., it will contribute to some extent.

Policy Implications of Off-Shoring

          The most important features of the U.S. economy that 
        make it attractive as a location for science and technology 
        production are the tremendous base of activity already in 
        place; the favorable climate for business; the range of 
        customers eager to make use of new technologies; and the 
        flexibility of the economy that encourages business 
        experimentation. Policy must make sure that these advantages 
        stay in place. Efforts to regulate against off-shoring would 
        discourage companies from locating science and technology jobs 
        in the U.S. and undermine the very jobs these efforts were 
        attempting to save.

          One of the most acute problems facing the U.S., one 
        that is likely to worsen over time, is the rising cost of 
        health care. To the extent that support and technical jobs in 
        this sector can be performed at lower cost overseas, this will 
        help not only the fiscal deficit, but all Americans that use 
        the health care system. Policy-makers should encourage the use 
        of the global economy to increase competitive pressure in the 
        health care market and cut costs. It makes no sense to lament 
        the fact that so many Americans lack health insurance and then 
        stand in the way of measures that could lower health care costs 
        by taking advantage of the global economy.

          The U.S. is already a major exporter of services and 
        could become a larger exporter if foreign markets were more 
        open. The U.S. has a lot to gain from trade negotiations that 
        would open up service sectors around the world.

          Compared to most other advanced countries the U.S. 
        spends very little on worker training. Many companies report 
        that they are unable to find skilled workers but many companies 
        are unwilling to provide the training that would create the 
        needed skills. Given the high rate of turnover in the U.S. 
        labor market that is not surprising because companies do not 
        want to train someone only to see them move to a competitor. An 
        important step that Congress could take to help U.S. workers 
        find better jobs and compete in the global market is to create 
        financial incentives for companies to train workers, and 
        financial penalties for companies that do not train. Our best 
        companies today that do train their workers would benefit from 
        such a policy.

Education, Globalization and the Science and Technology Workforce

    We know that the American education system is not providing 
adequate skills to many Americans, skills that would allow them to get 
better jobs and that would increase the number of people that can work 
in R&D and technology jobs here in the U.S. This is a hard problem to 
fix, and part of the difficulty is that many students are unwilling to 
study technical subjects. We could help, however, by increasing 
opportunities and incentives. Higher education has become more 
expensive for low-income families because the value of government 
scholarships and awards has not kept pace with rising education costs. 
Congress could help solve this problem by providing additional grant 
money for students that lack the resources to attend.
    Americans do respond to incentives. Many people, including myself, 
believe that it is in the interest of the economy as a whole to have an 
increase in the number of people educated in science and technology and 
hence a case for public support of science and technology education. 
Having a strong science and technology workforce based in the U.S. 
helps generate good jobs and preserve our current strength in this 
area. Congress could add to the size of this workforce by providing 
more graduate scholarships in science and technology subjects that are 
available to U.S. citizens and permanent residents. It is contradictory 
to talk about the need to protect our technology infrastructure if we 
are unwilling to pay the modest amounts needed to strengthen it 
directly.

Conclusions

    Globalization is being blamed for problems that have been created 
by failures in other areas. The U.S. does not save enough; job 
transitions are too costly because they can cause a loss of health 
insurance; workers that lose or leave jobs are not given adequate 
income or retraining support to help them find new jobs that are better 
than the ones they may have lost. Denmark has developed a system of 
``flexicurity'' that gives them a flexible labor market but provides 
substantial but tough-minded support for workers. Most of the rest of 
Europe has income support but not enough flexibility. The U.S. has 
flexibility but not enough support. The Danish model is not one that 
could be translated directly to the U.S., but there are lessons for the 
U.S. here. Denmark has more people employed than does the U.S., 
relative to population, and sustains a lot of good jobs.
    For a number of years the value of the U.S. dollar against many 
currencies was out of line with the level that would allow U.S. workers 
to compete effectively and exploit the underlying strength and 
productivity of the U.S. economy--it is still out of line against some 
currencies. The most important way to make sure the U.S. economy 
retains its strength as a center of technology jobs is to increase 
national saving and reduce our dependence on capital inflows from 
overseas, inflows that are the counterpart and enabler of our trade 
deficit. The Federal Government has run very large cumulative budget 
deficits for many years. We need a fiscal policy in which there are 
budget surpluses during periods of full employment.
    Trying to strengthen the R&D and technology jobs base of the U.S. 
by subtle or overt protectionism is a mistake. The U.S. is already an 
attractive location for these activities and it will become more 
attractive if we can take advantage of the global economy to reduce 
costs. In particular, Americans will be much better off if we can use 
the global economy to reduce the crushing costs of health care.



    Chairman Gordon. Thank you, Dr. Baily.
    And now Dr. Gomory, we will now get to you.

 STATEMENT OF DR. RALPH E. GOMORY, PRESIDENT, ALFRED P. SLOAN 
                           FOUNDATION

    Mr. Gomory. Thank you, Mr. Chairman.
    Mr. Chairman, Members of the Committee, thank you for the 
opportunity to take part in this important hearing. The 
subjects we are going to discuss today are the ones to which I 
have devoted much of my life, and so this opportunity means a 
great deal to me, and I thank you.
    I will make only one basic point in all my testimony, and 
it is this: In this new era of globalization, the interests of 
companies and countries have diverged and this divergence of 
goals enormously complicates the issue of national 
competitiveness. Countries have always looked to their 
companies to be productive and, thus, to be able to be provide 
productive and high-paying jobs and contribute strongly to the 
total output of the country, its GDP, gross domestic product. 
GDP is what countries want from their companies. Companies have 
always needed profits, both to survive and to do something for 
their shareholders, and these two different sounding goals were 
once tightly linked, but that has changed. Globalization has 
now made it possible for global corporations to pursue their 
profits by building capabilities abroad. Instead of investing 
in the United States and using R&D to increase their U.S. 
productivity, corporations today have the option of producing 
goods and services abroad using low-cost labor and import the 
goods or services into the United States. But in creating their 
profits in this way, they are building up the total output of 
goods and services of other countries while breaking their once 
tight links with America's own GDP, America's output.
    The effect on the United States of the internationalization 
of the scientific and technical enterprise must be understood 
as one part of this revolutionary process of globalization. The 
role of science and technology in globalization is very 
special. S&T does not contribute to a nation's wealth by 
employing large numbers of people in high-value-added or high-
wage jobs. It contributes by supporting a relatively small 
number of people whose work is intended to give a competitive 
edge to the end products, whether those end products are goods 
like cars and computers or services like call centers or 
advanced medical services. It is these end products, not the 
R&D itself, that make up the bulk of a country's output and 
most of a corporation's revenues and support of the jobs and 
wages of its employees. It is the competitive edge that is 
obtained from R&D.
    If in the process of globalization the production or 
delivery of services and of the end product moves overseas, so 
do the wages. Even if R&D should remain behind, which in the 
long run it tends not to do, the vast bulk of value creation 
has moved to another country, and it is there that it supports 
the wages and GDP of that country, and this is an important 
shift. The productivity, the ability to produce goods and 
services of both countries have changed. It is at this point 
that a common confusion enters. The theory of free trade is 
invoked to say that although such shifts are painful to those 
who lose their jobs, they will find new ones, and the result is 
cheaper and better goods that benefit consumers so that, 
overall, the country comes out ahead. However attractive this 
idea, it is in fact an incorrect characterization of the theory 
of free trade.
    Free trade owes its deserved appeal to the sound notion 
that if all countries produce the things at which they are 
relatively best and then trade these goods and services with 
countries which themselves produced what they supply best, then 
the global community and all its people will benefit. This is 
free trade, and I am a supporter of it. But in the economic 
analysis that produces this very favorable view of free trade, 
productive capabilities to make goods and services are taken as 
fixed. It is goods that are traded, but the ability to produce 
them is fixed, and that is not just a limitation of the theory, 
because it is easy to show that the uniformly benign results of 
free trade theory simply do not apply if there are also 
productivity shifts. Globalization, therefore, is not free 
trade because it does involve productivity shifts.
    When the United States trades semiconductors for Asian 
sneakers, for example, that is trade, and the conclusion of 
economic theory is that this type of exchange clearly benefits 
both countries, but when U.S. companies build semiconductor 
plants and R&D facilities in Asia rather than the United 
States, then that is a shift in productive capability and 
neither economic theory nor common sense asserts that that 
shift is automatically good for the United States. Since 
globalization, as I said, does involve productivity changes, 
free trade theory does not apply, and the forecast of a benign 
outcome is not based on that theory. Again, globalization is 
not free trade.
    However, economic theory is not a blank on this subject. 
What economic theory does show about productivity shifts is 
they tend to benefit the home country when its trading partner 
is a relatively undeveloped country. As the trading partner 
becomes more developed, the benefits decrease and pretty soon 
you reach a point where further development of the trading 
partner is detrimental to the home country. You are losing more 
to the new competitive ability of your trading partner than you 
gain from cheaper goods. Although it is common to propose 
tariffs under these circumstances, the only real antidote in 
this situation is to do the things that increase U.S. 
productivity, and in a globalized world, that is not easy. The 
desire to increase productivity often translates into asking 
for improved education and more money for R&D, often K-12 
education. Proposals of this sort about education and R&D can, 
in themselves, only be helpful. They can only be harmful if 
they create the belief that these measures are enough to deal 
with the problem. They are only a first step but a good one.
    The difficulties in improving education are well known, and 
those improvements are slow to come by, and also, there are 
limits to what can be done by education. We cannot expect 
education to turn out Americans who are so productive that they 
are worth hiring in place of the four or five Asians that can 
be hired for the same amount of money. More R&D, too, can only 
help but the R of R&D, basic research, that knowledge is spread 
around the world rapidly today so it becomes the common 
property of those who are developed enough to know how to use 
it, and there are more of these than ever before. Development, 
the D, may well result in greater productivity, but that 
productivity may well today in a globalized company itself be 
abroad, and it will not result, therefore, in the greater 
productivity of American workers or of the American economy. 
These measures are all good. They were even better in the past, 
but in today's globalized world their effect is somewhat 
weakened by globalization.
    However, there are measures that work, even in a globalized 
world, because they tend to align company and country 
interests, and in looking at such approaches, we will be 
following in the footsteps of the Asian countries themselves. 
The Asian countries have made it profitable, and that is what 
companies need, for foreign, often U.S. corporations to create 
high-value jobs in their countries, and they do this by 
offering tax and other incentives as well as an undervalued 
currency that make it profitable for corporations to locate 
high-value jobs in their countries, and we should consider 
incentives that reward companies in the United States for the 
same thing. If we want high-value-added jobs, let us reward the 
companies for producing such jobs whether they produce that 
through the use of R&D, through the use of more-efficient 
manufacturing, through marketing, through a better way to 
deliver a service or through any form of American ingenuity by 
any means, at all. Let us reward the end result.
    To show that incentives exist, let me briefly outline one, 
and this is only suggestive. We could have a corporate tax rate 
that would be scaled to the value added per American worker, 
full-time-equivalent worker, of corporations operating in the 
USA. Companies with high value add per U.S. employee would get 
a low rate, a low tax rate. A company with low value add per 
U.S. employee would get a high rate. This tax could be made 
revenue-neutral--very important. It would be an incentive for 
companies with high-value-added jobs to locate and keep their 
operations in the United States and it could be as strong or as 
weak an incentive as desired.
    Let me finish by saying that in this country, we have had a 
remarkable culture of entrepreneurship that has helped ideas to 
become reality and which provides rich rewards for those 
accomplishments. Though we have had corporations in which it 
was recognized that it was in their own interest to invest 
alongside the U.S. workforce and make it possible for that 
workforce to increase its productivity, we need to consider 
incentives such as the tax mentioned above to realign the 
profit interests of corporations with interests of the country, 
and since we are dealing with globalization, not free trade, 
that alignment today is not automatic.
    Thank you very much for listening.
    [The prepared statement of Dr. Gomory follows:]
                 Prepared Statement of Ralph E. Gomory
    Mr. Chairman, Members of the Committee, thank you for the 
opportunity to take part in this hearing. The subjects that we are to 
discuss today are the ones to which I have devoted much of my life. I 
was for almost 20 years the head of the research effort of a major 
international corporation, (IBM), for the last 17 years as the head of 
a major foundation (Alfred P. Sloan) deeply interested in science and 
technology. In addition, for almost my entire adult life, I have been 
active as an individual researcher first in mathematics and more 
recently in economics, I am pleased and honored to be here today and to 
have this opportunity to testify.
    I will make only one basic point in my testimony: In this new era 
of globalization the interests of companies and countries have 
diverged. In contrast with the past, what is good for America's global 
corporations is no longer necessarily good for the American people.
    The effect on the United States of the internationalization of the 
scientific and technical enterprise can only be understood as one part 
of the revolutionary process of globalization, which is fundamentally 
revising the relation of companies to the countries from which they 
have originated. In this new era of globalization the interests of 
companies and countries have diverged. What is good for America's 
global corporations is no longer necessarily good for the American 
economy.
    In 1953 when General Motors Chairman Charlie Wilson told the U.S. 
Senate that ``For years I thought what was good for the country was 
good for General Motors and vice versa''; he was articulating a 
philosophy and belief that when American corporations were successful 
it was generally good for the American people. But that was before 
globalization.
    What ``Engine Charlie'' Wilson thought was largely true then 
because American corporations invested and prospered right alongside 
the American worker. Whether it was in GM manufacturing plants or in 
IBM's research and development labs companies gave American workers the 
tools to outproduce the rest of the world.
    Companies thrived by having the best plants and equipment and 
information processing, not through having the longest work year in the 
world. And the workers and the American people more generally shared in 
that productivity and prosperity.

Misalignment of Company and Country

    But over the last decade, what is good for the country and what is 
good for corporate America have gotten out of alignment. Today, most 
companies emphasize, to the exclusion of nearly everything else, 
corporate profitability and shareholder benefit. By measuring 
themselves only on profit in a globalized world, American companies may 
be able to succeed, but America the Nation and American workers cannot.
    We understand that profit is a creative force. Companies come into 
existence to create profits, and in turn they create GDP, the goods and 
services that constitute a nation's economic output. And in constantly 
striving for more profits, companies become ever more efficient and 
create ever more GDP. As Adam Smith pointed out, ``It is not from the 
benevolence of the butcher, the brewer or the baker that we expect our 
dinner, but from their regard to their own interest.''
    But globalization has now made it possible for global corporations 
to pursue their profits by building capabilities abroad. Instead of 
investing alongside U.S. workers and using their investment and R&D to 
increase their productivity, corporations today can produce goods and 
services abroad using low-cost labor and import them into the U.S. But 
in creating their profits this way, they are building up the GDP of 
other countries while breaking their once tight links with America's 
own GDP.
    All of this is part of the process of globalization.

Globalization of Science and Technology

    The role of science and technology in globalization needs to be 
understood. S&T does not contribute to a nation's wealth directly by 
employing large numbers of people in high value-added or high wage 
jobs. It contributes by supporting a small number of people whose work 
is intended to give a competitive edge to the end product, whether that 
is goods or services. It is these end products, whether they are cars 
or computers or medical services that make up the bulk of a 
corporation's revenues and support the wages of its employees.
    If in the process of globalization the production (or delivery in 
the case of services) of the end product moves overseas, so do the 
wages. Even if R&D remains behind, the vast bulk of value creation has 
moved to another country and it is there that it supports the wages of 
employees. This is an important shift. It is important, because in the 
long run a country cannot consume more value than it produces and this 
shift decreases the value it produces.
    Of course what we see is that R&D is also moving offshore, so that 
form of value creation is also moving to other countries.
    It is at this point that a common confusion enters. If these 
production, delivery of services and/or R&D shifts occur as the free 
and unfettered actions of corporations the theory of free trade is 
invoked to say that although this is painful for those who lose their 
jobs, the result is cheaper and better goods that benefit consumers, so 
that overall the country comes out ahead.
    However that is an incorrect characterization of the theory of free 
trade.

Trade and Productivity Changes--Globalization Is Not Free Trade

    Free trade owes its deserved appeal to the sound notion that if all 
countries produce the things at which they are best, and then trade 
those goods and services with countries which themselves produce what 
they supply best, then the global community and its workers will all 
benefit. Economic theory uses the phrase ``the gains from trade'' to 
describe this.
    In their analysis of trade economists usually take productive 
capabilities as fixed and describe trade in the goods and services that 
those capabilities provide. It is this narrow meaning of trade that 
economic theory clearly shows to be superior for both parties over 
failure to trade. Hence economists emphatic rejection of tariffs and 
other barriers to trade.
    But when productivity capabilities are not fixed but are changed in 
the countries that are trading with each other, as they are in 
globalization and as they are changing today especially in Asia, the 
world finds itself in a whole new ball game. The end result of that 
change, even when the period of adjustment is over, may be better for 
one's country or it may be worse, depending on the circumstances.\1\ 
And globalization is clearly replete with productivity changes.
---------------------------------------------------------------------------
    \1\ In Reference [5] Gomory and Baumol discuss when productivity 
shifts are mutually beneficial and when there is in fact a conflict in 
national interests.
---------------------------------------------------------------------------
    Conclusions about trade in the narrow sense with fixed capabilities 
should not be confused with conclusions about the effect of 
productivity shifts. There is nothing in either common sense or 
economic theory which says that improvement in the productivity 
capabilities of other countries is necessarily good for your country. 
This observation holds true even if these productivity shifts are 
brought about by the free and unfettered actions of corporations.\2\
---------------------------------------------------------------------------
    \2\ In fact the economic literature has a long history of both 
general theories and specific examples by distinguished economists 
showing that improvements in the productivity of a trading partner, 
even if unaccompanied by a diminution of productivity at home, can be 
harmful to the home country. References [1], [2], [3], [4] and [5].
---------------------------------------------------------------------------
    When the U.S. trades semiconductors for Asian t-shirts, for 
example, that is trade in the narrow sense.\3\ And the conclusion of 
the most basic economic theories is that this exchange clearly benefits 
both countries. But when U.S. companies build semiconductor plants and 
R&D facilities in Asia rather than in the U.S., then that is a shift in 
productive capability, and neither economic theory nor common sense 
asserts that shift is automatically good for the U.S. even in the long 
run.
---------------------------------------------------------------------------
    \3\ Generations of economist have been trained on the England makes 
textiles, Portugal makes wine model. In these discussions no 
productivity shift was involved.
---------------------------------------------------------------------------
    Since globalization is free trade plus productivity changes the 
benign conclusions of the free trade model with fixed capabilities 
simply do not apply to globalization.
    However, even in these circumstances theory does continue to point 
steadily to the benefits of free trade. If there is a productivity 
change, the free trade outcome with the pre-change productivities is 
better than one with tariffs, and the free trade outcome with the new 
productivities is a also better than it would be with tariffs. Free 
trade does not guarantee that the productivity change is good for both 
countries, but both the before and after outcomes would be worse 
without it.

Harmful and Helpful Productivity Shifts

    Productivity shifts have often figured in the common discussions of 
trade. For a long time it was an article of faith that whenever a 
productivity shift occurs the U.S. will automatically be certain to 
export unproductive low paying jobs, while our workers are moved up to 
more productive, more highly paid positions--and for an equally long 
time, this was, indeed, a reasonable description of the productivity 
shifts that the U.S. experienced. But that is not the picture before us 
today.
    Since productivity changes are an essential element in 
globalization, and they can be harmful as well as helpful it is 
evidently essential to determine when they help and when they harm. 
Together with well-known economist William Baumol I have written a book 
[Ref. 6] and a number of papers on this subject using the most standard 
of economic models [References], and I will summarize our conclusions 
below. However, first we need to discuss just why the answer matters.
    As we pointed out in our book [Ref. 6, pp. 71-73] there can be a 
divergence of interests between multinational firms and their home 
country. An overseas investment decision that results in productivity 
increases abroad may prove to be very good for the profits of a 
multinational firm, but it is far from automatic that it will also be 
good for the firm's own country as a whole. So the answer does bear on 
what people are seeing and are concerned about.
    Our analysis shows that the impact on the home country of 
productivity increases in its trading partner can be favorable if the 
productivity increases occur in a very low wage country. American 
imports from that country become cheaper, trade expands for both 
nations and the result is mutual gain. But this becomes less true as 
the developing nation acquires greater capabilities and assumes a 
larger share of world production. At some point further development of 
the newly developing partner becomes harmful to the more industrialized 
country. Then, a firm that is moving production of goods and services 
overseas may find that it is generating greater profits for the 
company, but the same action can also result in an actual loss of 
national income for the company's home country. The home country will 
still be better off than it would be if trade were cut off altogether, 
but its position will be inferior to what it was before the improvement 
in the productive capacity of its developing trading partner.

Why Does This Happen?

    We obtain this result unequivocally from a careful mathematical 
analysis using the actual and standard equations employed by economists 
in their study of economic equilibrium. But the logic can also be 
understood in common sense terms.
    In the simplest models of trade,\4\ wages of countries reflect the 
proportions of world value they produce. A country that produces more 
than its population share of world value\5\ will be a high wage 
country; one that produces little will be a low wage country. Consider 
a low wage developing country, Devland, with which the more developed 
Homeland is trading a variety of products. Suppose that Devland 
succeeds in increasing to near Homeland levels the productivity with 
which it produces a commodity, clothtex that it has been importing from 
Homeland. Because of its low wage, it can now produce clothtex at a new 
low price and so it succeeds in taking over all or part of the clothtex 
market. As the new situation settles down we would expect the wage in 
Devland to have increased relative to the wage in Homeland as Devland 
now makes a larger proportion of the world's goods.
---------------------------------------------------------------------------
    \4\ Often referred to as Ricardian models.
    \5\ As measured by current prices.
---------------------------------------------------------------------------
    The overall economic effects on Homeland are then: (1) consumers in 
Homeland get clothtex at lower prices and (2) because of the new higher 
relative Devland wage, the prices of the other goods imported into 
Homeland from Devland go up. With clothtex having become cheaper for 
Homeland consumers, while the other imports have become more expensive. 
This can either be a good or bad outcome for Homeland, depending on how 
much the price of clothtex has declined and how much else is being 
imported from Devland. For this reason such productivity shifts may 
often not be benign.
    We emphasize that a negative outcome for the home country is not 
exceptional or rare. The simplest example is provided by the standard 
England (cloth)--Portugal (wine) model often used to illustrate the 
benefits of free trade. If we add to that familiar model the effect of 
production shifts by allowing a cloth industry to emerge in Portugal, 
the effect is to lower the standard of living of England and raise that 
of Portugal. [see Endnote]
    More generally how do these two effects balance out? The favorable 
effect of each individual industry shift is not likely to grow as 
Devland develops since Devland is most likely, to take over the 
industries in which low wage matters most, or industries in which they 
have some level of natural advantage such as climate or culture. 
However, the unfavorable effect will steadily become more important as 
the Devland develops further and Homeland imports more and more from 
them.
    We can now see why the result we described above occurs. At some 
point ever-further development of the newly developing partner becomes 
harmful to the more industrialized country.

Where Are We Now?

    Our calculations tend to show that we move from benefit to loss 
when the wage of a country with which we are trading rises to one-
fourth or one-third of the U.S. wage. The size of the trading partner 
also matters, and we get into losing territory earlier when the trading 
partner has a large population. If we had to guess, we would venture 
that we are now at that point in relation to some of the Asian 
countries.
    Of course, one may well argue that even that is a benign outcome 
for the world. Perhaps we are too rich and we should give up something 
to those who are poorer. That is a perfectly defensible position. 
However, that is not the way globalization and offshoring are usually 
described to the American people. Rather, we are assured that it is 
bound to make us richer in the long run, after the pain of change has 
been absorbed.
    To summarize: The most standard basic economic theory deals with 
the universal benefit of free trade between countries with fixed 
productivities. Most discussions, however, lump that conclusion with 
those valid for the effects of developments that change the 
capabilities of the trading partners. The uniformly benign features of 
the fixed productivity case are then claimed for the more general one 
as well. There is no basis for these claims. Analysis shows that the 
results can go either way, so the people of this country should not 
count on some long-range outcome that must inevitably make up for 
present pain. That day may never come.
    Alan Blinder recently pointed out in Foreign Affairs,\6\ that the 
effect of the production shifts that are likely to occur may well be so 
large that it is hard to think of them as even reasonably benign. Our 
calculations show the same thing, a developed country trading with a 
much larger (in population) country that is initially undeveloped and 
then increases its productivity capabilities, can suffer a precipitous 
drop in its standard of living. But our analysis shows no reason to 
expect that to be only a temporary pain.
---------------------------------------------------------------------------
    \6\ Reference to Blinder article.
---------------------------------------------------------------------------

Protectionism and Globalism

    One might well wonder how two such mistaken concepts, 
protectionism, in which we forgo the gains from trade, and the 
automatic win-win view of globalization which we will refer to as 
``Globalism'' which at times put our economy at risk, can persist with 
so little rational underpinning, but the answer is not hard to find.
    Protectionism thrives, and will continue to thrive, because of the 
support it gives to the immediately affected domestic manufacturers and 
their employees. Similarly globalism is thriving today at least partly 
because it supports and gains support from a group that is very 
powerful today, the multinational corporations. For that reason we 
think that both protectionism and globalism will be with us for a long 
time to come whatever the rationality of these views from the point of 
view of economic theory.
    In addition both protectionism and globalism have a natural 
structure that contributes to their persistence. Tariffs and other 
impediments to trade may provide large benefits to the limited set of 
firms in the protected industries and their employees, while the 
diffused damage to the rest of the Nation, though far greater in total, 
may only have a small effect on each of the many individuals upon whom 
the burden falls. Similarly, outsourcing may substantially benefit a 
small group of firms at the expense of widely diffused costs falling on 
the rest of the Nation to a degree hardly noticed by each affected 
individual. Thus, the proponents of socially damaging trade protection 
or socially damaging outsourcing are likely to be organized and 
strongly motivated, with little effective opposition from the remainder 
of the community, though the latter, in total, bear the brunt of the 
damage.

Can Anything Be Done?

    This testimony does not pretend to take on in any systematic way 
the task of answering the question, ``What is to be done?'' I will be 
content if I can contribute to clarification of the some of the issues. 
However just the distinctions about trade we have made are suggestive.
    To obtain the benefits of trade in the narrow sense we need free 
trade. This means, in particular, that we need to address the major 
distortions in the market caused by the systematic mispricing of Asian 
currencies. If we do not have a free market in currencies we cannot 
claim that the benefits of free trade are being achieved.
    At the same time, turning back to the issue of changing 
productivities, we must continue to improve U.S. productivities 
relative to those of the Asian nations. This often translates into 
asking for improved K-12 education and more money for R&D. Improved 
education is hard to come by and it is hard to imagine an improvement 
in education so profound that it turns out Americans who are so 
productive that they are worth hiring in place of the four or five 
Asians who can be hired for the same wage. More R&D can only help but 
it should be clear from the discussion above that R&D, even if it 
remains in the U.S., can have only a limited impact. Proposals of this 
sort about education and R&D can only be helpful. They can only be 
harmful if they create the mistaken belief that these measures can deal 
with the problem.
    I think that effective measures will have to tackle the problem 
more directly. Asian countries have made it profitable for foreign 
(often U.S.) corporations to create high value added jobs in their 
countries by offering tax and other incentives that make it profitable 
for corporations to locate high value added jobs in their countries. We 
need to look hard at incentives that reward companies in the U.S. for 
the same thing. If we want high value added jobs let us reward the 
companies for producing such jobs whether they do that through R&D, or 
just plain American ingenuity or by any means.
    One such possibility is a corporate tax rate that would be scaled 
by the value added per FTE by the workers of corporations operating in 
the U.S. A company with high value add per U.S. employee would get a 
low rate, a company with low value add per U.S. employee would get a 
high rate. This tax could be made revenue neutral. It would be an 
incentive for companies with high value added jobs to locate and keep 
their operations in the U.S. It could be as strong or as weak an 
incentive as desired.
    Many incentives, some natural and some much less so, have worked in 
the U.S.'s favor and have helped to create a long history of economic 
growth. We have had a great range of natural resources, and a 
remarkable culture of entrepreneurship that helps ideas to become 
reality, and which provides rich rewards for that accomplishment. We 
have had corporations in which it was recognized that it was in their 
own interest to invest alongside their U.S. workforce and make it 
possible for them to increase their productivity. We need to consider 
incentives, such as the tax mentioned above, that realign the profit 
interest of corporations with the interest of the country. In short, we 
think it likely that there is a major problem facing this country and 
we also think there are actions, most as yet largely unexplored, that 
can make a significant and beneficial difference.

References

[1]  Hicks, J.R. 1953. An Inaugural Lecture. Oxford Economic Papers 
5:117-35.

[2]  Dornbush, Rudiger W., Stanley Fisher, and Paul A. Samuelson, 1977 
Comparative advantage, trade and payments in a Ricardo model with a 
continuum of goods, American Economic Review 67 pp. 823-829.

[3]  Krugman, Paul R. 1985. A ``Technology Gap'' Model of International 
Trade in K. Jungenfelt and D. Hague eds. ``Structural Adjustment in 
Developed Open Economies,'' New York, St. Martin's Press pp. 39-45.

[4]  George E. Johnson, Frank P. Stafford ``International Competition 
and Real Wages,'' American Economic Review, Vol. 83, No. 2, Papers and 
Proceedings of the Hundred and Fifth Annual Meeting of the American 
Economic Association (May, 1993), pp. 127-130.

[5]  Samuelson, Paul A, 2004, Where Ricardo and Mill Rebut and Confirm 
Arguments of Mainstream Economists Supporting Globalization, Journal of 
Economic Perspectives, Volume 18, Number 3, pp. 135-146.

[6]  Ralph E. Gomory and William J. Baumol, 2001, Global Trade and 
Conflicting National Interests, MIT Press.

Endnote

    Even the familiar England-Portugal textile-wine model shows this 
effect. We assume, as usual, that England is much more productive in 
textiles and Portugal is much more productive in wine. With free trade 
and no productivity shifts England makes all the textiles and Portugal 
makes all the wine. If consumers spend a larger proportion of their 
incomes on textiles than on wine, England's wage will be higher than 
Portugal's, but both countries are better off than if they did not 
trade.
    Now let us consider globalization that adds productivity shifts to 
the free trade model. Through globalization Portugal learns textile 
manufacturing and enhances its productivity in textiles to something 
close to England's. Because of its lower wage, Portugal can now enter 
the textile market. However textiles are still England's only products. 
To remain in the textile market and meet the new lower price for 
textiles, wages must go down in England relative to Portugal, so there 
is a new exchange rate.
    At the new equilibrium, because of the exchange rate shift, the 
price of wine has gone up in England and consumers in England can 
afford less wine. English consumers with their new lower wage may 
consume about the same amount as before of the now cheaper textiles. 
However, with less imported wine, their standard of living will have 
fallen under globalization.
    Portugal still exports wine to England and imports textiles. But it 
imports a smaller quantity of textiles, since it now has the home grown 
product as well. Portuguese consumers can now afford to consume more 
textiles because they are cheaper. They consume the same amount of wine 
as before. Their standard of living will have improved.

                     Biography for Ralph E. Gomory
    Ralph E. Gomory has been President of the Alfred P. Sloan 
Foundation since June 1989 Gomory received his B.A. from Williams 
College in 1950, studied at Cambridge University and received his Ph.D. 
in mathematics from Princeton University in 1954. He served in the U.S. 
Navy from 1954 to 1957.
    Gomory was Higgins Lecturer and Assistant Professor at Princeton 
University, 1957-59. During this period he invented the first integer 
programming algorithm. He joined the Research Division of IBM in 1959, 
was named IBM Fellow in 1964. In 1970 he became IBM Director of 
Research with line responsibility for the IBM Research Division. Under 
his leadership the Research division made major contributions to the 
computer industry, such as the invention of the Relational data base, 
and also won two Nobel Prizes. While retaining responsibility for IBM's 
Research, Gomory became an IBM Vice President in 1973 and Senior Vice 
President in 1985. In 1986 he became IBM Senior Vice President for 
Science and Technology. In 1989 he retired from IBM and became 
President of the Alfred P. Sloan Foundation. There he has led the 
foundation into areas involving the scientific and technical work 
force, the study of individual industries, and issues of globalization.
    Gomory has served in many capacities in academic, industrial and 
governmental organizations, and is a member of the National Academy of 
Science, the National Academy of Engineering, and the American 
Philosophical Society He was elected to the Governing Councils of all 
three societies. He was a Trustee of Hampshire College and of Princeton 
University. He served for a number of terms on the National Academies' 
Committee on Science, Engineering and Public Policy (COSEPUP). He 
served on the President's Council of Advisors on Science and Technology 
(PCAST) from 1984 to 1992, and from 2002 to the present.
    Gomory has been a director of several Fortune 500 companies 
including the Washington Post Company, the Bank of New York, and 
Lexmark International, Inc., and of two small start-up companies. He 
was named one of America's ten best directors by Director's Alert 
magazine in 2000.
    He has been awarded eight honorary degrees and many prizes 
including the Lanchester Prize in 1963, the John von Neumann Theory, 
Prize in 1984, the IEEE Engineering Leadership Recognition Award in 
1988, the National Medal of Science awarded by the President in 1988, 
the Arthur M. Bueche Award of the National Academy of Engineering in 
1993, the Heinz Award for Technology, the Economy and Employment in 
1998, the Madison Medal Award of Princeton University in 1999, the 
Sheffield Fellowship Award of the Yale University Faculty of 
Engineering in 2000, he was elected to the International Operations 
Research Hall of Fame in 2003 and awarded the Lardner Prize of the 
Canadian Operations Research Society in 2006.
    Gomory has remained an active researcher with interests in 
mathematics, computers, and economics. In recent years, he has written 
on the nature of technology and product development, industrial 
competitiveness, technological change, and on economic models of 
international trade. He is the author of the MIT Press book (with 
Professor William J. Baumol) entitled ``Global Trade and Conflicting 
National Interests.''

    Chairman Gordon. Thank you, sir, and Dr. Duesterberg.

  STATEMENT OF DR. THOMAS J. DUESTERBERG, PRESIDENT AND CEO, 
                  MANUFACTURERS ALLIANCE/MAPI

    Dr. Duesterberg. Thank you very much, Mr. Chairman, for 
having me at this important hearing, and in the spirit of your 
admonition that this is a fact-finding hearing, I provided a 
lot of facts and figures in my testimony and I will refer to 
some of the charts in my testimony as I go through my brief 
synopsis.
    The subject of this hearing is of vital importance to 
manufacturers for the simple reason that this sector is more 
engaged in the global economy than the much larger services 
sector. It is also a leader in innovation, accounting for over 
60 percent of private-sector research and development in the 
United States and more than three-quarters of patents granted 
in the United States. Moreover, it has been subjected to 
foreign competition for the last 30 or 40 years so the 
experience of the manufacturing sector may shed some light on 
the future trajectory of the impact of globalization.
    In fact, the pressures of globalization have forced 
manufacturers to become leaders in finding ways to adapt to 
this competition. One of the major results of this competition 
has been to require them to find new ways to do things in a 
much more efficient way. They have realized the benefits of 
strong productivity gains. Figure 3 on page 3 of my testimony 
illustrates the strong acceleration of manufacturing labor 
productivity since the 1980s and the superior performance in 
productivity of the manufacturing sector in our economy.
    Productivity gains have created what is often referred to 
as a paradox of manufacturing. The sector is smaller in some 
very visible respects, such as employment and percentage of 
GDP, but it is much more global. While smaller, manufacturing 
has maintained its global marketshare, the chart, which is on 
page 5, shows that the U.S. share of global manufacturing 
output has actually increased slightly from about 22.9 percent 
in 1980 to 23.8 percent in 2003. More impressively, Figure 7 
shows that the U.S. manufacturers' share of global high-tech 
output increased from approximately 25 percent in 1980 to 42.5 
percent by 2005, which is the latest year for which we have 
data, which is a subject in and of itself.
    A few myths and beliefs about globalization viewed from the 
perspective of multinational manufacturers who are the most 
engaged in the global economy in the first place, there is not 
a rapid offshoring on a net basis of jobs. Figure 9 shows that 
the employment share of U.S. parent multinationals has remained 
relatively flat as a share of total non-bank private industry 
between 1988 and 2004. The data show that an increase in 
employment at foreign affiliates is positively correlated with 
growth in jobs at the domestic parent. While overall job losses 
do affect the domestic manufacturing sector, they are not 
amongst the most globally engaged parts of the manufacturing 
sector.
    There are myriads of benefits from engagement abroad, not 
the least of which is access to foreign markets, which are in 
many cases the fastest growing on a relative basis in the 
world. And in fact the reason, the primary reason for locating 
a manufacturing facility abroad, is for access to local and 
regional markets. In fact, 90 percent of the production of 
foreign affiliates of U.S. manufacturers are sold into the 
local markets and less than 10 percent back to the United 
States. Finally, I would note that 64 percent of U.S. employees 
of foreign affiliates are in high-wage countries such as Europe 
and Japan and Canada, and overall, the employment at 
multinational corporations, including the United States records 
that about 90 percent of the employment is still in high-wage 
countries.
    Now let us turn to a little bit of data on the 
globalization of innovation. In fact, most of the data that we 
have refers to research and development. R&D is the least 
globalized activity of U.S. multinationals. Foreign affiliates 
represent 31 percent of all sales and 28 percent of employment, 
but R&D only represents about 13.7 percent among foreign 
affiliates. This is up slightly from 11 percent in 1990. 
Furthermore, more R&D is insourced into the United States than 
is outsourced. Companies such as Siemens and others do a great 
deal of research as well as the German auto companies, Japanese 
auto companies. The growth of R&D spending by U.S. parent 
companies in the United States increased at a 6.1 percent 
annual rate since 1990, while the increase in R&D spending 
among foreign affiliates grew at a 6.2 percent rate, so that 
the vast amount of the research remains in the United States, 
and again, I would emphasize that more R&D is insourced than is 
outsourced.
    In sum, while R&D activity and technological excellence is 
being globalized, and there is evidence that, as I believe the 
Chairman cited and the Ranking Member cited as well in the 
Texas study, there is some evidence of increased globalization 
of R&D in countries such as China, partly through tax 
incentives and other means of increasing their R&D activity, 
but nonetheless, the U.S. maintains a commanding presence in 
research and development activity.
    I would emphasize, though, that while R&D activity is 
certainly of interest, it is only one component of a very 
complex ecosystem that produces what has come to be known as 
innovation. Whether R&D offshoring, if it accelerates, is 
indicative of the true globalization of a broad class of 
activities that enter into the innovation process is, at the 
moment, a very open question. Many other factors--technical 
work force, legal protection for intellectual property, 
financial innovation and more qualitative factors such as 
propensity for risk-taking--all figure prominently into the 
generation of innovation. Unfortunately, there is a paucity of 
data available that has left many crucial questions about the 
globalization of innovation activity basically unanswerable at 
this point in time.
    We at the Alliance have done a little bit of research to 
try to understand better the complex activity of innovation. 
Without going into a great deal of depth, we have tried to 
explain both product innovation and process innovation, the way 
you make things, which is of equal importance. Our results show 
that variables such as capital investment, university-industry 
linkages and the employment of science and engineering 
personnel are important ingredients for innovation. The results 
of our empirical work that are particularly interesting are 
those regarding basic R&D expenditures at universities and 
colleges. Our research indicates that a 10 percent increase, 
for example, in nominal dollar expenditures on basic science at 
universities and colleges generates after a lag a 4.1 percent 
increase in utility patent approvals and with a little bit 
longer lag of four years a nearly two percent increase in the 
multi-factor productivity growth in manufacturing. All of this 
suggests that we need to do a great deal further work on fully 
understanding the process of innovation and the data is just 
not available yet. A lot of data needs to be gathered in order 
to accomplish this. This is especially true given the anecdotal 
evidence of the potential globalization of R&D activities and 
the fear that innovation will be outsourced in its wake. We at 
the Alliance are undertaking some of this research along with 
many other institutions around the country.
    Finally, in terms of the policy implications of what I have 
reported here today, we think that our efforts should be 
directed to expanding the extent of free trade while working to 
end the many unfair trading practices that still plague our 
ability to access foreign markets. It is a poorly understood 
fact that only five percent of the trade deficit in 
manufactured goods, which is of course 75 percent of our 
overall deficit, is with countries where we have free trade 
agreements while these same countries account for 30 percent of 
our imports and over 44 percent of our exports. To remain 
globally competitive, we need, first and foremost, to keep our 
domestic economy strong with a sensible monetary policy that we 
have been blessed with for a number of decades and maintain the 
low-tax, spending constrained, low-deficit fiscal policy that 
still satisfies the needs of crucial social goals. Over time we 
will need to increase national savings both to curb our trade 
deficit and to fund needed capital and social investment. 
Moreover, we need to be increasingly mindful of the structural 
costs that our businesses face in a world where capital is 
increasingly mobile, an issue investigated in depth in some of 
our studies. In particular, we need to address high 
differentials in corporate taxes, tort litigation costs--of 
course, we spend more on tort litigation than we do on R&D in 
the United States--high natural gas costs, health care costs 
that are borne by employers and regulatory burdens of U.S. 
firms as compared with our leading global competitors. Finally, 
we need to combat the mercantilist policies, such as 
maintaining undervalued currencies, which Martin alluded to, 
theft of intellectual property and subsidizing export 
industries practiced by competitors, such as China and other 
Asian nations.
    Finally, we need to put our own house in order, as the 
others have mentioned. We need to ratchet up investment in the 
sciences and engineering disciplines so crucial to innovation 
and to attracting domestic students to these fields, and 
finally, we need to think seriously about creating a better 
career path for U.S. scientists and engineers.
    Mr. Chairman, thank you very much for this opportunity to 
appear before your group.
    [The prepared statement of Dr. Duesterberg follows:]
              Prepared Statement of Thomas J. Duesterberg
    Mr. Chairman and Members of the Committee, I want to thank you for 
holding this hearing on a subject of vital and timely importance to 
U.S. manufacturers. My organization represents over 500 leading 
manufacturing firms whose products range from basic materials to 
advanced manufacturing and leading-edge technology and associated 
services. The Alliance itself is primarily a research and executive 
education provider, but we do advocate public policies benefiting our 
member companies. Notwithstanding the support of our member companies, 
the views I will present today are mine alone and do not necessarily 
represent the unanimous opinion of our members.

I. The U.S. Manufacturing Sector: Evolution and Adaptation

    The subject of the hearing today is of vital importance to 
manufacturers for the simple reason that this sector has been much more 
engaged in the global economy than the much larger services sector. It 
is also a leader in innovation, accounting for over 60 percent of 
private sector research and development (R&D) in the United States and 
more than three-quarters of patents granted in the United States. For 
this reason, it is necessary to understand the manufacturing sector's 
response to globalization in order to fully appreciate the many issues 
surrounding the globalization of innovative activity. Figures 1 and 2 
illustrate the strong pattern of manufacturing globalization of the 
past two decades. As shown in Figure 1, capital goods exports as a 
share of U.S. manufacturing output grew from 11 percent in 1985 to 26 
percent by 2006, while the share of consumer goods exports quadrupled 
from two percent to eight percent during the same time frame. Both 
innovation and constant research and development efforts are required 
to stay competitive. For capital goods, the path of import growth has 
been somewhat similar to the path of export growth. As shown in Figure 
2, capital goods imports as a share of manufacturing output grew from 
eight percent in 1985 to 26 percent by 2006, while consumer goods 
exports skyrocketed from nine percent to 27 percent. As a result, the 
trade deficit, which is 75 percent or more in manufactured goods, is 
largely a function of our imbalance in consumer goods and raw materials 
such as oil. We are roughly in balance--and fairly competitive in 
capital goods--particularly those which embed high technology and 
require substantial scientific and engineering resources.




    The pressures of globalization have forced manufacturers to become 
leaders in finding ways to adapt to international competition. They 
have quickly realized that cost containment and the relentless pursuit 
of both process and product innovation are the keys to survival. 
Constant improvement programs such as lean manufacturing and six sigma 
have rapidly become the norm in multinational manufacturing 
enterprises. Partially as a result, the manufacturing sector as a whole 
has realized the benefits of strong productivity gains, although some 
argue that these gains are limited to R&D intensive, high-technology 
industries. Figure 3 illustrates the strong acceleration of 
manufacturing labor productivity growth since the late 1980s. And while 
the data aren't strictly comparable, it is quite evident that 
manufacturing productivity growth has far exceeded productivity gains 
for the economy as a whole. There is anecdotal evidence that service-
sector firms are beginning to mimic manufacturing productivity 
improvement practices. In fact, some studies show that those service 
industries most closely tied to manufacturing, such as wholesale trade, 
are the leaders in productivity enhancement.




    Productivity gains have created what is often referred to as the 
``paradox of manufacturing.'' The sector is smaller in some very 
visible respects but more global. Figure 4 shows that the manufacturing 
share of the U.S. economy has declined from 18.6 percent in 1987 to 
12.1 percent by 2006. Part of this decline, but by no means all, is 
explained by the productivity induced price effect engendered, in turn, 
by global competition. Additionally, global competition has restrained 
pricing power in manufacturing to a much greater extent than in 
services, so that manufacturing's nominal share of GDP declines despite 
continued growth in physical output at about the same pace as the 
overall economy. Figure 5 shows the even more dramatic employment 
decline. As shown, the manufacturing workforce has declined from 20.7 
percent of the U.S. workforce in 1980 to 10.4 percent by 2006. And in 
fact data show that manufacturing employment has been declining as a 
share of the U.S. workforce since the early 1950s, suggesting that the 
reasons for the employment decline are fundamental to the factory 
sector's evolution and are not simply a result of the current 
challenges presented by emerging markets. But while smaller, 
manufacturing has maintained its global position. Figure 6 shows that 
the U.S. share of global manufacturing output has actually increased 
slightly from 22.9 percent in 1980 to 23.8 percent in 2003. And more 
impressively, Figure 7 shows that the U.S. manufacturers' share of 
global high-tech output increased from approximately 25 percent in 1980 
to 42.5 percent by 2003 (the latest year for which data are available). 
Clearly, the sometimes painful domestic adaptations have allowed the 
U.S. manufacturing sector to survive and compete in the global business 
environment in which it now operates.




II. U.S. Multinational Foreign Direct Investment: Myths and Benefits

    While the macro data presented above illuminate the broad sectoral 
response to globalization, a fuller understanding of the key issues 
related to jobs, capital investment, and innovation requires a more 
focused study of the multinational firms that dominate the U.S. 
manufacturing sector. Along these lines, MAPI's Chief Economist, Dan 
Meckstroth, recently published a comprehensive essay on the role of 
multinationals and the benefits and costs of multinational activity.\1\ 
Popular myth often creates the incorrect perception that multinational 
corporations (MNCs) are the agents of U.S. job and capital loss in a 
globally integrated world. But Dr. Meckstroth's paper provides a wealth 
of data and empirical research to show that the business dealings of 
U.S. multinationals with their affiliates abroad complements rather 
than substitutes for the domestic economic growth. Figure 8 illustrates 
the large footprint that multinationals (including foreign-owned MNCs 
operating in the United States) have in the manufacturing sector in 
spite of only accounting for less than one percent of all manufacturing 
firms. As shown, during 2004 multinationals accounted for about two-
thirds of manufacturing employment and about 85 percent of U.S. 
manufacturing GDP.
---------------------------------------------------------------------------
    \1\ Daniel J. Meckstroth, ``Globalization Complements Business 
Activity in the United States,'' Manufacturers Alliance/MAPI, ER-624e, 
January 2007. I wish to thank Dr. Meckstroth, Cliff Waldman, and Ernest 
Preeg for their assistance in preparing this testimony.




    Contrary to common myth, multinationals aren't transferring jobs 
out of the United States, even as they increase production among their 
foreign affiliates. Figure 9 shows that the employment share of U.S. 
parent multinationals has remained relatively flat as a share of total 
non-bank private industry employment, while foreign-owned multinational 
employment in the United States actually increased slightly between 
1988 and 2004. Domestic employment growth in both manufacturing and 
non-manufacturing MNCs generally equals or exceeds the growth of other 
companies in the same sector over the past 20 years. Finally, the data 
show that an increase in employment at foreign affiliates is positively 
correlated with growth in jobs at the domestic parent. While overall 
job losses do affect the domestic manufacturing sector, they are much 
less among MNCs.
    As the Meckstroth paper explains, expansion abroad through foreign 
direct investment is the only way to accelerate the pace of growth 
beyond what is possible in the domestic marketplace. Demand is growing 
rapidly around the world in such places as China, India, and Southeast 
Asia at a faster pace than in the United States. The data of the past 
three decades show clearly that multinationals invest abroad primarily 
to gain access to fast-growing markets for their products and services. 
Table 1 shows considerable growth in affiliate sales as a share of 
total global sales for MNCs, from 1999 to 2004 foreign affiliate sales 
grew at a 10 percent rate, faster than the 3.5 percent rate of domestic 
parents. Figure 10 shows the destination for the sales of U.S. 
manufacturing affiliates since 1989. In 2004, only 10 percent of these 
affiliate sales were back to the U.S. parent corporation, and that 
share has declined modestly over the past 15 years. Although not shown 
separately in the figure, only one percent to two percent of U.S. 
foreign-affiliate sales are exported back to the United States to third 
parties. The vast majority of the sales of U.S. affiliates, about 90 
percent are either to the country in which the affiliate is located or 
to the nearby region. This pattern dates back at least to the 1920s and 
1930s when U.S. automakers began to produce in Europe and elsewhere to 
access local and regional markets. These problems apply to the sales of 
non-manufacturing affiliates as well.




    The issue of low-wage country arbitrage is perhaps the most 
contentious and difficult one in analyzing outsourcing. Figure 11 shows 
that the share of U.S. majority-owned foreign affiliate employment in 
high-income countries remained large in 2004 at 64 percent. But it 
nonetheless fell steadily from a peak of 75 percent in 1989. Further, 
Table 2 shows the considerable growth of employment of U.S. majority-
owned foreign affiliates in China, India, and to a lesser extent 
Mexico. If China and India are excluded, affiliate employment growth in 
the low and middle income countries is marginal, reinforcing the notion 
that foreign investment largely seeks fast-growing, large markets like 
China and India.




    While the trend toward low-wage country foreign direct investment 
is growing, Dr. Meckstroth's paper notes that anecdotal evidence 
suggests that market expansion, not costs, is the primary driver of 
U.S. entry into these high-potential emerging market countries. The 
absence of understanding of this simple fact has created misguided 
perceptions about job exporting that are often belied by actual data. 
For example, the fear that manufacturing jobs are ``being lost to 
China'' is somewhat undermined by the weakness in manufacturing 
employment growth in China during the late 1990s and early 2000s, shown 
in Figure 12.




    The MAPI study also highlights the indirect benefits to the 
domestic U.S. economy from multinational global profit-seeking 
behavior. U.S. businesses and consumers gain from lower cost products, 
improved services, higher quality goods and services, longer product 
life cycles, higher profits, and higher quality jobs. U.S. firms are 
motivated to produce abroad to avoid tariffs and other barriers to 
adapt products to those markets, and--as I will discuss later--tap 
local talent and other resources. And far from being substitutes for 
domestic activity, the paper points to credible research which shows 
that when foreign affiliates expand, their U.S. parents also expand 
domestic operations. Finally, many studies show that low wages and fast 
growth in foreign countries do not in and of themselves attract foreign 
investment. That is why foreign investment is still high in developed 
countries, including increased investment into the United States. 
Ninety percent of the employees of U.S. MNCs are in high wage 
countries, including employment at the domestic parent plants.

III. The Next Wave: The Globalization of Innovation

    While much public debate has been centered on the consequences of 
globalization for U.S. job and investment growth, the potential 
globalization of innovation supply chains has received far less 
attention. The reason is quite clear. At the moment, as pointed out by 
the Meckstroth paper, R&D is the least globalized activity within 
multinationals. Foreign affiliates represent 31 percent of all sales 
and 28 percent of employment among U.S. multinationals. These firms 
have, however, been reluctant to globalize research activity for fear 
of losing intellectual property protection for what are often their 
core competences. Consequently, foreign affiliates' share of 
multinational R&D spending has not changed appreciably during the 13 
years from 1990 when it was 11.4 percent to 2003 (the latest data 
available) when it was 13.7 percent. Figure 13 shows the total R&D 
spending by U.S. MNCs at the parent and among foreign affiliates. It is 
also worth noting that more R&D by non-U.S. firms is insourced than is 
outsourced by U.S. firms; the United States remains an outstanding 
destination for R&D by European, Japanese, and other Pacific Rim 
developed countries.




    To understand the motivation for and the benefits of expanding 
production and the limited offshoring of R&D networks around the world, 
some extended discussion is warranted. Global production and sourcing 
can, first, improve the rate of return on product innovation by 
extending the life cycle of products. New products (such as computers 
or medical diagnostic devices) introduced in the United States, Western 
Europe, and Japan tend to have high value propositions. Early in the 
product life cycle, production costs are relatively high because firms 
are producing first-generation products on a small scale, using 
relatively high-skilled workers and employing specialized capital 
equipment. The relatively high price of products at the early stage of 
a product's life, however, compensates for the start-up costs and risk. 
Over time, newer product generations are introduced, and the market for 
the older generation matures. The longer the products embodying old 
technology stay on the market, the more likely competitors will be to 
commoditize them. Intense competition may lead to falling prices, and 
eventually products in the mature stage of the product cycle do not 
have a large enough market and revenue stream to support U.S. 
production costs. Globalization, however, can preempt discontinuation 
of such mature product lines and provide them with a new life. An old-
technology product or a significant portion of the product can be 
manufactured using less expensive capital and low-wage labor in 
developing countries.\2\ Otherwise the product would simply be 
supplanted by foreign competitors. The ability to generate profits on a 
product over a longer life cycle increases the rate of return on 
innovation and promotes more new product development in industrialized 
countries.
---------------------------------------------------------------------------
    \2\ Craig K. Elwell, Foreign Outsourcing: Economic Implications and 
Policy Responses, Congressional Research Service Report for Congress, 
Order Code RL32484, June 21, 2005, p. 15.
---------------------------------------------------------------------------
    Research evidence also finds that multinationals benefit from 
global research and development and from an expanded international 
knowledge network. Economists Chiara Crascuolo, Jonathan E. Haskel, and 
Matthew J. Slaughter\3\ examined data on several thousand firms in the 
United Kingdom and found that globally engaged firms generate more 
innovation outputs than firms not globally engaged. In the 1998 to 2000 
time frame, only 18 percent of firms with domestic-only operations had 
made some significant product or process innovation. The average number 
of patents applied for among the non-multinationals was just 0.1 per 
firm. Among firms that were multinational parents, however, 45 percent 
reported either product or process innovation during the time period, 
and they averaged ten patent applications each.
---------------------------------------------------------------------------
    \3\ Chiara Crascuolo, Jonathan E. Haskel, Matthew J. Slaughter, 
``Global Engagement and the Innovation Activities of Firms,'' National 
Bureau of Economic Research, Working Paper 11479, June 2005, pp. 1-46.
---------------------------------------------------------------------------
    An important finding from the research on how globalization 
improves innovation concerns the way multinationals achieved superior 
knowledge generation. MNCs are more innovative than non-multinationals 
not just because they have more researchers, but because they have an 
expanded global knowledge network. In the case of patents, increased 
innovation is derived from collaboration and networking with other 
researchers in universities around the world. When it comes to 
production process and product innovation, multinationals are able to 
learn more than non-multinationals from both domestic sources of 
applied knowledge and a wide network of international sources, such as 
suppliers, customers, and their foreign affiliates\4\ The resulting 
productivity gains from multinationals' innovation directly benefit 
Americans' standard of living, and the knowledge spillover indirectly 
benefits domestic firms that supply and/or are customers of 
multinationals.
---------------------------------------------------------------------------
    \4\ Ibid, p. 5.
---------------------------------------------------------------------------
    The availability of technical talent overseas and the rapid growth 
of foreign markets provide further incentives for U.S. multinationals 
to expand international research centers. The reason that foreign-
affiliate R&D shown in Figure 13 is such a small proportion of the 
total is that R&D is a core value generator for U.S. multinationals. 
U.S. multinationals are reluctant to globalize the activity and risk 
losing protection for their intellectual property.
    Another way to illustrate the point that the United States is not 
rapidly offshoring R&D activity to foreign affiliates is to look at R&D 
spending growth. From 1990 to 2003, R&D spending by U.S. parent 
companies increased at a 6.1 percent annual rate of growth, and 
majority-owned foreign-affiliate R&D spending grew at a 6.2 percent 
annual rate of growth--expanding essentially at the same pace.
    Although R&D spending by U.S. parent companies kept pace with R&D 
spending by foreign affiliates from 1990 to 2003, there is some 
evidence that the future pace of R&D globalization may be accelerating. 
The United Nations Conference on Trade and Development (UNCTAD) found 
in a 2006 survey that developing countries are likely to grow in 
importance as R&D locations for multinational firms. Fifty-seven 
percent of multinational firms surveyed already have an R&D presence in 
China, India, or Singapore,\5\ and 67 percent of U.S. firms indicate 
that their foreign R&D is set to increase over the next five years.\6\ 
While the lion's share of global R&D clearly remains with 
industrialized countries, emerging economies, most notably China and 
India, are becoming more important innovation centers. A recent survey 
of 186 of the world's largest firms found that 77 percent of R&D 
centers over the next three years are likely to be in China and 
India.\7\ My colleague Ernie Preeg has shown that China is expanding 
R&D expenditures at the rate of 22 percent per year, far above the six 
percent in the United States and five percent in the European Union and 
Japan.\8\ Of course some of the attraction to perform R&D in China is 
due to the tax breaks and other subsidies provided by both Beijing and 
regional governments. Additionally, China frequently tries to leverage 
research and knowledge transfer in return for access to its huge and 
fast-growing market.\9\
---------------------------------------------------------------------------
    \5\ United Nations Conference on Trade and Development, UNCTAD 
Survey on the Internationalization of R&D, Current Patterns and 
Prospects on the Internationalization of R&D, UNCTAD/WEB/ITE/IIA/2005/
12, December 12, 2005, p. 1.
    \6\ Ibid, p. 11.
    \7\ See ``R&D Outsourcing,'' Business Week, May 10, 2006.
    \8\ Ernest H. Preeg, The Emerging Advanced Technology Superstate, 
Manufacturers Alliance/MAPI, June 2005.
    \9\ Ibid, pp. 46-50, for a discussion of Chinese tax and other 
incentives to attract investment in the semiconductor industry.
---------------------------------------------------------------------------
    Despite the enthusiasm for developing country R&D, the United 
States remains a commanding R&D presence in the world, although China 
especially is becoming more attractive when future investments are 
considered. When UNCTAD asked non-U.S. multinationals from around the 
world what their preferred location was for new R&D projects abroad, 
the United States was listed second most often. China was mentioned 
most often, and India was listed third most often, followed by Japan 
and the United Kingdom.\10\ The survey demonstrates that the United 
States is a preferred location for R&D among multinationals 
headquartered in other developed and emerging countries.
---------------------------------------------------------------------------
    \10\ UNCTAD, op. cit., p. 13.
---------------------------------------------------------------------------
    In sum, while R&D activity and technological excellence is being 
globalized, the United States maintains a commanding presence at this 
time. An often overlooked fact is that the United States has a surplus 
in R&D and service payments among multinationals. Figure 13 shows that 
foreign-owned firms spend more on R&D in the U.S. than foreign 
affiliates of U.S. multinationals spend abroad. As noted earlier, R&D 
insourcing thus exceeds outsourcing among multinationals in the United 
States. Furthermore, the United States has a trade surplus in royalties 
and licensing fees ($62 billion in receipts versus $26 billion in 
payments in 2006) and a trade surplus in business, professional, and 
technical services ($41.3 billion in receipts versus $33.2 billion in 
payments in 2005). At the same time that U.S. multinationals are 
looking abroad for technology, research, and collaboration, the rest of 
the world is coming to the United States for the same services. 
Globalization thus clearly complements innovation in the United States.
    While R&D activity is certainly of interest, it is only one 
component of a complex ecosystem that produces what has come to be 
known as innovation. Whether R&D offshoring, if it accelerates, is 
indicative of the true globalization of the broad class of activities 
that enter into the innovation process is, at the moment, an open 
question. Many other factors, technical workforce, legal protection for 
intellectual property, financial innovation, and more qualitative 
factors such as propensity for risk taking all figure into the 
generation of innovation. The potential emergence of innovation supply 
chains that originate in the U.S. and other major manufacturing centers 
raises a number of questions for U.S. policy-makers. Research is needed 
to expand understanding of the globalization of innovation and to 
provide needed insights to inform the domestic U.S. policy response. 
Unfortunately, a paucity of data has left many crucial questions about 
the globalization of U.S.-based innovation activity unanswerable.
    The existing literature on the globalization of innovation suffers 
from a number of crucial shortcomings. First, the myopic focus on R&D 
as the sole indicator of innovative activity has distorted results and 
hidden key policy implications. The absence of a coherent framework and 
statistical robustness has also plagued these studies. For the moment, 
it is reasonable to conclude that we fall far short of a full 
understanding of the innovation globalization dynamic as well as the 
forces that are driving innovation offshoring decisions.

IV. MAPI Innovation Research Program: Conclusions and Implications

    To contribute to understanding of the forces that impact innovation 
in the manufacturing sector, both domestic and international, two of my 
MAPI colleagues, Cliff Waldman and Jeremy Leonard began collaborating 
on a significant innovation research program in the early part of 2006. 
The purpose of the initial work was to specify and estimate a simple, 
yet utilitarian model of innovation in the U.S. manufacturing sector 
and to derive comprehensive indicators of product and process 
innovation.
    Their research provided robust statistical evidence that the 
drivers of innovation extend well beyond the business R&D spending that 
is typically thought to be the principal source of innovation.\11\ Our 
results show that variables such as capital investment, university-
industry linkages, and the employment of science and engineering 
personnel are also important ingredients for innovation. The results 
were particularly interesting with regard to basic R&D expenditures in 
universities and colleges. Our equations indicate that a 10 percent 
increase in nominal dollar expenditures on basic science research at 
universities and colleges generates a 4.16 percent increase in a four-
year moving average of U.S. utility patent approvals after a lag of six 
years and a nearly two percent increase in multi-factory productivity 
growth in manufacturing five years hence. Basic R&D in universities and 
colleges as well as the employment of science and engineering personnel 
proved to be important ingredients for both process and product 
innovation.
---------------------------------------------------------------------------
    \11\ Jeremy A. Leonard and Clifford Waldman, An Empirical Model of 
Innovation in the U.S. Manufacturing Sector, Manufacturers Alliance/
MAPI, ER-614e, August 2006, and Leonard and Waldman, Innovation and Its 
Determinants: A Review of the Literature and Outline of a New Model, 
Manufacturers Alliance/MAPI, ER-601e, February 2006.
---------------------------------------------------------------------------
    To aid those who need to track innovation growth we used these 
equations to develop composite indicators of both product and process 
innovation. These indicators show the fluctuation in productivity and 
patents (which we used to proxy process and product innovation) if 
those variables were only influenced by our postulated innovation 
drivers. The authors corrected for such things as changed patent laws, 
which impact patent activity, and the multitude of cyclical and 
institutional factors that impact multi-factor productivity. The two 
indicators are nothing more than the fitted values of their respective 
equations. For each year, it is the equation's prediction of either 
productivity or patents. By using the fitted value series as a measured 
index, we are allowing the user to view the fluctuation in productivity 
or patents as if they were only influenced by our postulated innovation 
indicators. Neither productivity or patents are pure measures of 
innovation output. Productivity is impacted by the business cycle and 
institutional factors. And patents are impacted by patent law. But by 
creating a fitted value series for our equations, we are coming as 
close as we can (both statistically and theoretically) to observing 
pure innovation output series.
    Figures 14 and 15 present the results of our predictions for the 
innovation proxies. They show that our product and process indicators 
appear to map out a plausible history. Clearly the 1970s and early 
1980s were troublesome times for U.S. manufacturing product innovation. 
As shown in Figure 14, sizable year/year declines in product innovation 
characterized numerous years of this period. The reasons are clear. 
Manufacturing R&D intensity fell below three percent during the 1977 to 
1979 period. The growth of funding for basic university R&D decelerated 
from 11.3 percent during the 1965 to 1969 period to 5.9 percent during 
the 1970 to 1975 period. But the growth of the U.S. tradable goods 
sector and the resulting growth of international competition 
subsequently forced domestic changes. Manufacturing R&D intensity grew 
from 3.0 percent in 1980 to 4.6 percent during 1987. And the growth of 
academic research expenditures accelerated from 5.9 percent during the 
1970 to 1975 period to 10.5 percent by the 1980 to 1985 period. 
Consequently, product innovation growth, while it has been volatile, 
has averaged a solid five percent since 1987.




    Regarding process innovation growth, shown in Figure 15, the 1970s 
were characterized by wide annual swings in growth but the average over 
the decade was a paltry 0.5 percent. During this period, high inflation 
eroded the real value of investment and academic R&D, and international 
competitive pressures were much less severe than they are today (indeed 
the United States typically ran a trade surplus in manufactured goods). 
There were far fewer incentives for business process improvement. 
During the 1980s, manufacturing process innovation growth accelerated 
to an average of 1.0 percent, but much of this was in the early years 
of the decade. The particularly sharp accelerations in 1983 and 1984 
were undoubtedly catalyzed in part by the dramatic tax cuts of 1981, 
which, among other things, accelerated depreciation of capital spending 
and boosted investment growth. Considerable concern about the future of 
the U.S. manufacturers at the beginning of the 1980s refocused 
attention on competitiveness, though little progress was made in the 
latter half of the decade. Finally, the rapid growth in unit labor 
costs, driven by double-digit inflation that occurred from mid-1979 to 
late-1981, forced manufacturers to reorganize production methods to 
remain profitable. The 1990s saw a further acceleration in process 
innovation growth, particularly in the latter half of the decade during 
which process innovation consistently grew in the two percent to three 
percent range. The 2001-2002 decline in process innovation growth was 
primarily due to a sharp decline in investment during the 2001 
recession.




    While our statistical work adds considerably to understanding the 
manufacturing innovation process, we realize that the global dynamic 
must be studied much more extensively to complete our understanding. 
This is especially true given the anecdotal evidence of the potential 
globalization of R&D activities, and the fear that innovation will be 
outsourced in its wake. Thus, our next project addresses the void of 
data and understanding on innovation globalization through the use of a 
large-scale survey of manufacturers. We will design a survey to gather 
data on manufacturer's innovation offshoring activities (going well 
beyond simply measuring R&D location) as well as the factors driving 
those activities. We further intend to gauge the innovative capacity of 
key target countries for U.S. manufacturing innovation investment by 
reconstructing our U.S. product and process indices where data are 
available, or by performing innovation case studies for countries where 
the necessary data are not available. The results of this new proposed 
study will allow for an assessment of the implications of innovation 
offshoring for the domestic U.S. manufacturing base, particularly as to 
whether emerging markets post significant competitive threats.

V. Some Policy Implications

    As globalization proceeds, many public officials, frustrated 
especially by the slow progress with China on such issues as currency 
and intellectual property protection, have begun to call for policies 
to protect markets via trade barriers and other means. Nothing could be 
worse for U.S. economic progress in a globalizing world. By closing 
markets, we negatively impact global economic growth, thus negatively 
impacting our own export opportunities. Export demand, in recent years, 
has been a key source of growth in the manufacturing sector, due 
partially to surprisingly muted domestic business investment demand. 
Further, by erecting protectionist barriers, we lose the growth, R&D, 
and productivity benefits that exposure to foreign markets has clearly 
afforded us. We might also lose the ability to access talent pools and 
new technology being developed around the world.
    Our efforts should instead be directed to expanding the extent of 
free trade while working to end the many unfair trading practices that 
still plague our ability to access foreign markets. It is a poorly 
understood fact that only 5 percent of the trade deficit in 
manufactured goods is with countries where we have free trade 
agreements, while these same countries account for 30 percent of our 
imports and 44 percent of our exports. But an avoidance of blatantly 
protectionist policies does not, in any way, imply that U.S. policy-
makers should not be putting forth an aggressive set of policies for 
maximizing U.S. competitiveness in the ever-changing global 
environment.
    To be globally competitive, we need first and foremost to keep our 
domestic economy strong with the sensible monetary policy that we have 
been blessed with for a number of decades and with a low-tax, spending 
constrained, low-deficit fiscal policy that nonetheless satisfies the 
needs of critical social goals. Over time we will need to increase 
national savings both to curb our trade deficit and fund needed capital 
and social investment. Moreover, we need to be increasingly mindful of 
the structural costs that our businesses face in a world where capital 
is increasingly mobile, an issue investigated in great depth in two 
MAPI studies.\12\ In particular, we need to address the high 
differentials in corporate taxes, tort litigation costs, natural gas 
costs, health care costs born by employers, and regulatory burdens of 
U.S. firms, as compared to our leading global competitors. Finally, we 
need to combat the mercantilist policies, such as maintaining 
undervalued currencies, theft of intellectual property, and subsidizing 
export industries, practiced by competitors such as China and other 
Asian nations.
---------------------------------------------------------------------------
    \12\ Jeremy A. Leonard, The Escalating Cost Crisis: An Update on 
Structural Cost Pressures Facing U.S. Manufacturers, Manufacturers 
Alliance/MAPI and The Manufacturing Institute of the National 
Association of Manufacturers, September 2006.
---------------------------------------------------------------------------
    To put our own house in order, we need to ratchet up investment in 
the sciences and engineering disciplines so crucial to innovation and 
to attracting the domestic students to these fields. Our research shows 
a clear link of university research with innovation. The experience of 
the massive investment in sciences in the 1960s, when nearly one 
percent of GDP was devoted to federally funded, non-defense, scientific 
research, which led to many of the technological breakthroughs at the 
core of American manufacturing success in the 1980s and 1990s, should 
also guide our thinking. We also need to think seriously about creating 
a better career path for U.S. scientists and engineers.
    The need for a globally competitive level of innovation to compete 
with both low-cost producers and technologically advanced competitors 
by expanding our product offerings and market opportunities is clear. 
But economists do not have a full understanding of the innovation 
process and there is a particular void as regards the globalization of 
innovation activity. Recent MAPI research supports the notion that an 
innovation policy extends well beyond a focus on R&D investment. While 
private sector R&D is clearly important, we have provided robust 
statistical evidence regarding the high returns that can be realized 
from investment in university and college R&D. Further, we have learned 
that the science workforce and capital spending matter to innovation 
output, as well. Anecdotal evidence that emerging market nations might 
grow as significant global innovation centers shows the critical need 
for data and analysis on the globalization of innovation. Only then can 
we understand the extent and nature of the dynamic, the factors that 
are driving location decisions, and the implications for the domestic 
U.S. economy.

                  Biography for Thomas J. Duesterberg
    Dr. Thomas J. Duesterberg is President and Chief Executive Officer 
of the Manufacturers Alliance/MAPI. He also serves as President of The 
Institute for Technological Advancement, an affiliate of The 
Manufacturers Alliance; and is a member of the Board of Directors of 
The Manufacturing Institute, an affiliate of the National Association 
of Manufacturers. Prior to joining the Alliance, Dr. Duesterberg was 
Senior Fellow and Director of the Washington Office of the Hudson 
Institute. Former positions include serving as Chief of Staff to 
Congressman Chris Cox (1995-96); U.S. Assistant Secretary of Commerce 
for International Economic Policy (1989-93), where he was responsible 
for international trade and investment issues, trade promotion, and 
advocacy programs to assist U.S. exporters and investors; 
Administrative Assistant to U.S. Senator Dan Quayle (1981-89); Senior 
Research Analyst, International Business Services (1979-81); and 
Associate Instructor, Stanford University (1978-79). Dr. Duesterberg is 
co-author of two books and numerous magazine, journal, and op-ed 
articles on international trade, information technology, and global 
economics. He also edited and wrote chapters in two books: Riding the 
Next Wave: How This Century Will Be a Golden Age for Workers, the 
Environment, and Developing Countries (Hudson Institute; 2001); and 
U.S. Manufacturing: The Engine of Growth in a Global Economy (Praeger; 
2003). He writes a regular column for Industry Week called ``The 
Competitive Edge.'' He graduated magna cum laude from Princeton 
University in 1972 and received an M.A. and a Ph.D. from Indiana 
University.
    The Alliance is a policy research organization with approximately 
500 member companies representing a broad spectrum of industries from 
machinery and components, primary metals, automotive, chemicals, oil 
and gas, electronics, telecommunications, computers, office systems, 
aerospace, and similar high-technology industries. The Alliance 
conducts original research in issues critical to the economic 
performance of the private sector and offers an executive development 
program with more than 2,000 senior executives participating.

                               Discussion

    Chairman Gordon. Thank you to the panel. There were a lot 
of common denominators, a little bit of controversy, but a lot 
of common denominators. As we discussed earlier, we do have 
something of a time crunch. I had a chance to make a statement 
earlier, so I am going to yield my question time to Mr. Baird, 
who I think was our first person to come in.
    Mr. Baird. I thank the Chairman.
    Chairman Gordon. And I would ask maybe we might try to keep 
it to three or four minutes, rather than five, and hopefully, 
we will have most people get a chance to participate.
    Mr. Baird. I thank the Chairman very much. I have got a 
number of questions, but I will be brief.
    Dr. Gomory, I thought your point about the possible export 
of technology and innovation was interesting, but it seems 
companies are in a bind. Let us suppose you make an aircraft 
and the country says, ``We won't buy your aircraft unless you 
outsource a portion of your manufacturing process,'' and so you 
say, ``Okay, you can make the compass wings.'' Then they 
acquire the knowledge of the compass wings. How do you deal 
with that?
    Dr. Gomory. Well, that is a very good point, and I would 
like to stress that the problems here are system problems. The 
companies are doing what anyone else would have to do. It is 
not that they are disregarding. It is that the incentives that 
are provided are irresistible, and I think basically we have to 
provide counter incentives. There is just no other way.
    Mr. Baird. What will a counter incentive look like?
    Dr. Gomory. In that case, I would have to think. I just 
don't know.
    Mr. Baird. Okay.
    Dr. Duesterberg, this point you made at the end, I am not 
sure I fully understand it. Maybe you can explain it to me a 
little bit. It is a poorly understood fact that only five 
percent of the trade deficit of manufactured goods with 
countries we have free trade agreements, but et cetera, et 
cetera. Elaborate on that for just a second.
    Dr. Duesterberg. Well, we have NAFTA, we have CAFTA, we 
have some free trade agreements with smaller countries. The 
only point of this was that our trade deficit with the 
countries with which we have FTAs is only a very minor part of 
our overall trade deficit.
    Mr. Baird. Explain what----
    Dr. Duesterberg. Well, the overall majority is, of course, 
with the Asian countries. We don't have FTAs with them. So the 
simple point is that countries with which we have FTAs, we seem 
to do better with.
    Mr. Baird. Your point being that an FTA alone is not the 
cause for our trade deficit----
    Dr. Duesterberg. That is correct.
    Mr. Baird.--or the export of jobs?
    Dr. Duesterberg. That is correct.
    Mr. Baird. How are we to proceed in keeping innovation 
domestically? If you could do one thing, what would it be, very 
briefly, each of you, starting with Dr. Blinder. What would the 
one thing be? Dr. Baily.
    Dr. Baily. Well, I think that is right. That is probably 
the one thing I would do. We have to make sure that our 
corporate tax system does not encourage people to move jobs 
overseas also.
    Mr. Baird. Dr. Gomory.
    Dr. Gomory. I think if we reward the creation of high-
value-added jobs with a low tax rate, we will see a surge of 
invention, of ways to take things that are today very labor 
intensive and make them into high-value jobs. It is the need 
for end jobs that drives both invention and ultimately 
scientific and engineering jobs. Many people are shying away 
from scientific and engineering jobs not because of lack of 
education. More people enter college wanting to get an 
engineering or science degree than we would ever know. That is 
a fact. That it not a well-known one. But they do not see a 
good career. So we have to create a demand if we are going to 
have a larger stream, and just having, you know, fellowships 
and things won't do it.
    Mr. Baird. So just encouraging people to do more math and 
science and all the stuff we have been----
    Dr. Gomory. I think that is all good, but if there is no 
demand, people are too smart to do that.
    Mr. Baird. Dr. Duesterberg.
    Dr. Duesterberg. Well, this is not original, but I would go 
back to the experience of the 1960s and 1970s when we had an 
excitement about science and technology programs, partly driven 
by the threat of Sputnik, first of all. Then we had the Apollo 
program, which was visionary. We spent nearly three-quarters of 
one percent of GDP on the Apollo program at its height, so we 
need to have adequate level of funding for the basic research, 
but we also need to value at a national level the sorts of 
tasks, jobs, training that go into motivating people who want 
to be a part--make the sacrifices to be a part of the process.
    Mr. Baird. Thank you.
    I yield back, Mr. Chairman.
    Chairman Gordon. Thank you, Mr. Baird.
    Mr. Hall.
    Mr. Hall. Mr. Chairman, thank you.
    Dr. Blinder, you estimated that there are potentially 30 to 
40 million jobs that could be offshored, but then as you read 
your testimony on through, it seemed like you ameliorated that 
a little bit by saying that not all will be. How do you arrive 
at that number, and what do you mean by not all will be? What 
changed that?
    Dr. Blinder. Sure. Let me take the questions backward. If 
you think about the manufacturing sector, where we have had 
offshoring for a very long time, we still have about 10 percent 
of Americans working in the manufacturing sector. We have not 
lost all those jobs. All, or almost all, of them are 
potentially offshorable in the sense that one could build a 
factory to do this or that in another country and then ship the 
goods back to America. The crucial defining characteristics to 
me, in trying to make the separation between potentially-
offshorable and not-potentially-offshorable jobs, are two. The 
less important was requiring physical proximity. So, if you 
sell hot dogs in Yankee Stadium, you have to be at Yankee 
Stadium. That is the less important one. The more important 
one, covering many more jobs, is the importance of face-to-face 
contact. If it is either absolutely essential that it be done 
face-to-face, or if the task is done very much better face to 
face, so that if you try to electronically deliver it you lose 
a lot in the process, then those jobs are not very likely to be 
offshored. So that goes to cultural sensibility, feel and 
touch, that kind of thing. Jobs that require that as essential 
inputs are not going to be replaced by Internet messages.
    Mr. Hall. Dr. Duesterberg, in your testimony you say that 
an increase in employment at foreign affiliates is possibly 
correlated with growth in jobs in its domestic parent. How does 
this mesh with the overall American manufacturing job losses 
over the past decade, and how would you characterize the role 
of domestic entrepreneurship and the innovation strategies of 
multinational companies? What is happening here? You gave good 
advice to Chris Cox and Dan Quayle just yesterday. How about 
giving us some leadership on this?
    Dr. Duesterberg. Well, the seeming paradox is that the 
companies that are most globally engaged tend to be the ones 
that are avoiding job losses, and in fact, increasing in a very 
slight way their----
    Mr. Hall. Like?
    Dr. Duesterberg. Well, like Intel, like a Microsoft, like a 
Nike, like a General Electric. I will offend everybody else by 
not mentioning them, but globally engaged companies that are 
successful. Boeing is another example. The ones that are hurt 
are the companies that are unable to make the sorts of 
investments both here and abroad to be competitive with the 
growing competition from low-cost producers in China and 
elsewhere. So the job losses tend to be concentrated in those 
sorts of smaller--frequently smaller industries that just don't 
have the wherewithal to become as globally engaged as they 
could. What should we do? We should do everything we can to 
maintain the environment here in the United States that 
supports innovation. We are a very litigious society. We have 
all talked about the problems with the education system. We are 
not providing enough good scientists, engineers. There are very 
real issues with access to foreign markets as well. Martin 
mentioned the currency undervaluation of China and for many 
years many other Asian currencies. That is a real problem. 
Subsides to production abroad are a very real problem. After 
all, China used to give, a few years ago, a five-year tax 
break, full tax break to companies that located there for the 
purpose of exporting outside of the country plus five more 
years at half tax rates. They have recently changed that, but 
that sort of activity certainly doesn't help. So it is a two-
pronged approach: do what we can to make the environment for 
innovation and for entrepreneurship strong here, combat unfair 
trade practices abroad.
    Mr. Hall. Let me just wind up with one last question. We 
are talking science and math and how we are going to do to get 
these kids interested in it and participating in it and how 
great it is going to be for them and paying teachers more and 
all that. Other than that, what can we do to change our 
educational system so our students are going to be ready to 
compete with the youngsters from China and India and anywhere 
else? Dr. Duesterberg.
    Dr. Duesterberg. Well, as I mentioned in an earlier 
question, I think sort of the culture is not necessarily as 
supportive as it should be of people entering these fields. I 
mean, I remember I went to college in the 1960s. Everybody 
wanted to be an aerospace engineer because we were doing the 
Apollo program. It was exciting. Commercial aviation was just 
taking off. It was a very remunerative field. Or they wanted to 
go into IBM where Ralph was working because we were, you know, 
inventing the computing industry. Now things have changed. We 
don't value that sort of activity as much culturally. There are 
a million other things that we could do to strengthen our 
educational system. I happen to like Chairman Gordon's idea of 
helping to produce better math and science educators at the 
secondary and elementary school level.
    Chairman Gordon. You are such a wise person. I hate to cut 
you off, but I would like as many people to participate as 
possible.
    So Dr. Wu, you are recognized.
    Mr. Wu. Thank you, Mr. Chairman, for always giving me that 
promotion to doctor. My mother really appreciates it.
    For the witnesses, I have been thinking about the aspect of 
offshoring R&D and academic work. I mean, you all have talked 
about service jobs and manufacturing jobs. I used to represent 
academic institutions, and I know that there are certain deals 
that folks cut. The Federal Government supports research. It is 
unlikely to support research at foreign institutions, but the 
private sector supports much more research, and that money is 
hot money. It is mobile money. It can go to a U.S. university 
or it can go elsewhere. Are you all concerned about foreign 
institutions, educational institutions in essence cutting our 
private sector or global companies a better deal on R&D and the 
true outsourcing of innovation so that, for example, with 
respect to this panel, if we were to do hearing in 10 or 20 
years, instead of having someone from Princeton, we would have 
someone from Prague. Instead of the rest of you all, you know, 
we would be bringing in experts from New Delhi or Beijing 
instead. Is that a real issue or not?
    Dr. Blinder. Well, of course, nobody really knows the 
answer to that, but my guess is, at least for the time being, 
it is not too much of an issue. We still--I don't want to say 
we have a monopoly, which we don't have a huge comparative 
advantage in higher education. The great preponderance of the 
great research universities of the world are in the United 
States, and I think that is likely to be true for a long time. 
That said, it is only natural for the rest of the world 
gradually to catch up to us. So, we can't expect to hold this 
hegemonic position forever.
    Dr. Baily. I agree with Alan on that. I am willing to bet 
there are quite a lot of foreign graduate students in your 
classes so I suspect Alan's own job actually is a little 
dependent on the global economy. If we maintain the strength of 
our universities, not just, you know, the top ten, which are so 
strong, but a lot of our State and local universities as well, 
we will maintain our position. And as Alan said, there is 
nothing wrong with other countries doing academic research, and 
by the way, there are foreign companies that support academic 
research in the United States.
    Mr. Wu. I yield back.
    Chairman Gordon. Thank you.
    Ms. Biggert.
    Ms. Biggert. Thank you, Mr. Chairman, and thank you all for 
really a very informative presentation. We in this committee 
have been talking about the globalization, about being 
competitive in a global economy, but I think you put all the 
pieces together, and I don't think we are doing a good enough 
job. I don't think we are doing a good enough job in education. 
You are talking about the universities, but I also serve on the 
Education Committee, and we have been looking at the results of 
No Child Left Behind, and I think it is pretty dismal actually. 
We have increased average yearly progress, we have increased 
performance, but when you think about that it is only 40, 45 
percent of the students even meeting grade level, and we say 
that that is great. We are not going to attract kids to science 
and math if we are not really giving them the basic education 
starting out and the will to study. Look at China, and the kids 
are going to school all year long. They are practically 
sleeping at their desks and there is a real drive, you know, to 
excel and to surpass us, and I don't think that we want the 
quality of life for our kids to go to school seven days a week, 
24 hours, but I think that we do need to maybe--we have a 
nation at risk, and you are talking about Sputnik and all the 
things that challenge us, but what can we do to really change 
that and make--people have a love of learning, I guess, that 
they don't seem to have now. We have got a love of leisure and 
grade inflation and things like that that really troubles me, 
besides our immigration policies that we are not bringing in 
students from other countries, mainly because we cut off a lot 
of that since 9/11. We talk about that innovation and 
creativity are the only ways that we are going to stay ahead, 
and yet, we are not. I think Members of Congress have finally 
realized research and development is so important, but a lot of 
people don't realize that yet. Can somebody help me out with 
that, or is that too broad?
    Dr. Blinder. I will take a little stab. I can't really give 
you detail because this is a huge question and there aren't 
clear answers. But to hearken back to something I wrote in the 
testimony, I think we need to move away faster, than we are 
doing from the 19th century educational system that we put in--
which features sitting at your desk, being quiet and rote 
learning where you fill in the little box with the electronic 
pencil. Life is not like that. And to the limited extent life 
is like that, it is either done better by a computer or by a 
low-wage person in a developing country rather than by an 
American. We need to get our kids doing more playing with 
ideas, more creativity, less rote learning. If you don't mind 
my saying so, since you mentioned you are on the Education 
Committee, that is not because of accountability reasons, which 
I am all for, but because of the focus on standardized rote 
learning tests and the teachers teaching to those tests, which 
we see all over America. No Child Left Behind is pushing us in 
the wrong direction, I believe that.
    Ms. Biggert. Thank you.
    I yield back.
    Chairman Gordon. Thank you.
    Since you were so nice, let us let Mr. Reichart have the 
remaining portion of your time, two minutes.
    Mr. Reichart. I will just make it real quick. Thank you, 
Mr. Chairman.
    Russia has lightweight strong titanium. Boeing manufactures 
the struts for the 787 in Russia. Is that the cheapest way to 
do it, manufacture in Russia and ship the finished struts to 
the United States or is it cheaper to ship the titanium and 
manufacture in the United States? And a follow-up question, our 
Coast Guard helicopters are re-engining, and they are buying 
their engines from France, and I am told that the only reason 
they are buying them from France is because it is the only 
place that makes them. Why doesn't the United States make 
engines that fit our Coast Guard helicopters?
    Dr. Duesterberg. Those are two different questions.
    Mr. Reichart. Yes.
    Dr. Duesterberg. With respect to how Boeing carries out its 
sourcing, it is frequently constrained by the demands of 
countries, which are its customers, to do part of their 
production in that country so that they can sell. This sort of 
activity is by and large, if not discouraged, it is made 
illegal by the global trading system, but it is often left 
unchallenged and not sanctioned. Whether it is the best way to 
produce is a technical question, and I am not capable of 
answering, but I think we ought to look very carefully about 
the requirements by foreign countries for local production as a 
reason for buying the product. And along those lines, we need 
to think more seriously as a nation about what our core 
competencies are in technologies that are related to our 
national defense. I don't think we have done a very good job of 
that in the past, and that is something that we are not capable 
of assessing, but somebody at the Pentagon and elsewhere, while 
they look at these, should be spending, I think, more time 
looking at these sorts of questions.
    Chairman Gordon. Thank you, Mr. Reichart.
    Dr. Baily. Can I quickly make a quick comment?
    That industry, the aircraft industry and, of course, the 
military hardware is something where the United States has a 
fairly substantial advantage. Obviously Boeing is in a struggle 
with Airbus, but quite a lot of the Airbuses are actually made 
in the United States, I mean, the engines are made and a good 
part of the aircraft, a significant part of it. So I think we 
are also the beneficiary of some of that.
    Chairman Gordon. Thank you. And let me suggest that all 
Members will have the opportunity to submit questions and all 
panelists will have opportunity to submit additional testimony, 
and Mr. Lipinski, I would like to yield the balance of our time 
and whatever nerve you have to stay as long as you would like.
    Mr. Lipinski. How much time do we have left in the vote, 
Mr. Chairman? All right.
    Well, I will try to keep this short. I will shorten to a 
couple quick comments and a question. The first thing is, as I 
waited for the vote that I thought was going to happen earlier, 
I listened to all your testimony from back in my office. I 
appreciate all your very thoughtful testimony. A critical 
issue--I want to point out one thing, Dr. Gomory. The high-
value-added jobs, I think that is critical that we keep talking 
about high-value-added jobs because I understand, and I am not 
sure everyone does, that some jobs are better jobs than others, 
not just individually for those that are employed there but for 
the implications, the multiplicative impact they have on the 
economy, especially on local communities. As I see 
manufacturing jobs leave from my district just because a guy 
can go down the street, get a job flipping burgers, he makes 
much less money but also has an impact on the community that is 
very significant and other jobs that are there. So, we have to 
keep focusing on that, and I also think that it is important 
that we can take care of our national defense, because when it 
comes time, we are--I don't want to rely on another country to 
produce things for us for our national defense. We need to take 
care of our exchange rates. I thank Dr. Duesterberg, Dr. 
Gomory, doctor and doctor, for mentioning those things. 
Exchange rates, we need to have fair trade.
    The question I have very quickly, and maybe get some 
comments later from you in writing, Dr. Duesterberg talked 
about the impact that basic research has on our economy. I just 
want to open that up. I want to ask you if you have any more 
information on that, if you can provide any more, and maybe I 
will just invite everyone else on the panel, if you have 
something really quick to say right now, let us know and, if 
you can provide any additional information on what impact do we 
see, do we have facts and figures on the impact that this 
research done at our universities has on our economy. Does 
anyone want to say anything quick, or we are just going to----
    Dr. Baily. There has been quite a bit of academic 
literature written on the spillovers from university research 
to private sector research, and you can see that in action. I 
mean, Silicon Valley is in some sense a reflection of the 
strength of Stanford and Berkeley. You see around Boston the 
strength of the high-tech sector there, Austin also with the 
strength of the University of Texas. So there has definitely 
been quite a bit written about the benefits that you get, the 
spillover benefits. If you have a very strong academic center, 
you also get private sector benefits and private sector jobs 
created.
    Mr. Lipinski. [Presiding] Thank you. Mr. Gordon has to 
leave so we have to run for votes. I can stay here and ask more 
questions. I think I am going to slow down my run. I want to 
thank you for your testimony, and if I can adjourn the hearing 
from here instead of over in that official chair, I adjourn 
this hearing. Thank you.
    [Whereupon, at 2:29 p.m., the Committee was adjourned.]
                              Appendix 1:

                              ----------                              


                   Answers to Post-Hearing Questions




                   Answers to Post-Hearing Questions
Responses by Alan S. Blinder, Director, Center for Economic Policy 
        Studies; Gordon S. Rentschler Memorial Professor of Economics, 
        Princeton University

Questions submitted by Chairman Bart Gordon

Q1.  During your oral testimony you recommended that we increase the 
number of students in math and science fields, but your research finds 
that these fields are highly vulnerable to offshoring. How do students 
pursuing these fields buffer themselves from having their jobs 
offshored? Should we be iuvesting in all science, technology, 
engineering, and mathematics (STEM) fields or only those that we expect 
will be rooted in America?

A1. I do believe that we should try to increase the numbers of U.S. 
students in science and math, even though many scientific jobs are 
vulnerable to offshoring. But, if we are to be smart about it, we will 
specialize in producing engineers and scientists for the jobs that are 
more difficult to offshore. For example, in the computer programming 
field, writing code for canned software programs is extremely easy to 
offshore. But it is very hard to offshore the jobs of people who 
customize software for use by specific companies and/or organizations, 
and who may therefore have to interact personally with people in those 
organizations to understand their business needs. It is wiser, in my 
view, to try to train people for these sorts of jobs, many of which 
blend people skills and business knowledge with scientific skills, than 
it is to try to decide which scientific fields are more promising.

Q2.  Could you comment on how your view of the economics of 
globalization differs from Dr. Gomory? Specifically, do you agree with 
Dr. Gomory's assessment that productivity shifts through globalization 
could make America worse off?

A2. At the conceptual level, I don't think Dr. Gomory's views on 
globalization and mine differ much, if at all. In principle, it is 
definitely possible that increased trade brought about by productivity 
improvements abroad could make America worse off, as he says. However, 
I am a bit skeptical that this has happened much in practice.

Q3.  During your testimony you mentioned that one of America's major 
sources of comparative advantage is its superior higher-education 
system. A number of universities are opening, or are considering 
opening, overseas campuses in the very countries getting many of the 
jobs being offshored. How does this activity affect the national 
economy?

A3. I don't have a clear answer to this question. It seems to me that 
the answer depends almost entirely on what goes on at these overseas 
campuses. For example: Do we attract top students from abroad, who then 
want to bring their skills to America? Or do we encourage top-flight 
American students to emigrate? (I suspect there is more of the former 
than the latter.) Similar questions arise related to the research done 
at these campuses.

Q4.  Are there specific steps that this committee should do to address 
the offshoring of STEM occupations?

A4. Like most economists, I believe that incentives (some, but not all, 
of them financial) have powerful effects on career choices. If the 
market refuses to reward scientists and engineers more highly, there is 
not a lot the Federal Government can or should do about it. But the 
government can do quite a bit to reduce the costs of getting a 
scientific education--e.g., graduate fellowships, undergraduate 
scholarships, grants to universities to subsidize scientific teaching 
and/or laboratories, and so on.
                   Answers to Post-Hearing Questions
Responses by Martin N. Baily, Senior Fellow, Peter G. Peterson 
        Institute for International Economics, Washington, DC

Questions submitted by Chairman Bart Gordon

Q1.  How is my view of globalization contrasted with that of Dr. 
Gomory? And specifically, what is my view on the issue of whether 
globalization can make the U.S. worse off.

A1. I agree with Dr. Gomory that globalization creates winners and 
losers. In order to gain the full benefits of globalization, I believe 
that US policy-makers must put in place adequate programs to help 
workers change jobs when needed and to acquire the skills for good 
jobs. Many employers today, including manufacturing firms, are crying 
out for skilled workers. There are good jobs out there. There would be 
more good jobs if the U.S. would balance its budget, save more, let the 
dollar adjust and reduce the trade deficit. I believe that on balance 
the U.S. benefits from globalization, where Dr. Gomory is more 
skeptical.
    If I understood him correctly, Dr. Gomory cited a recent article by 
Professor Paul Samuelson to the effect that globalization could hurt 
the U.S. as other countries develop economically. Professor Samuelson 
was one of my teachers at MIT and I respect him enormously. I thought 
that this particular article was technically correct but very 
misleading in its implications. In a key model in the article, the rich 
country (the U.S.) suffers when the poor country (China) grows rapidly. 
The reason for this is that in the initial situation (when China is 
still very poor) there is a substantial amount of trade from which the 
U.S. benefits greatly. As the poor country develops, the level of trade 
declines, according to the model. The rich country (the U.S.) is hurt 
by the reduction of trade between the countries. I see no relevance of 
this article to the situation of the U.S. and China where trade is 
expanding rapidly. This article actually points to the benefits of 
trade.
    Dr. Gomory wants to make sure that U.S. corporations face the right 
tax incentives to encourage them to locate production in the U.S. With 
some qualifications, I agree with him on this point.

Q2.  Is the OES Data valid for time series comparisons?

A2. There have been definitional changes, but I believe the conclusions 
from the table remain valid. This table in my testimony is taken from 
my colleague Jacob Funk Kirkegaard. He was kind enough to write an 
extended response to your question, which is attached at the end of 
this document.

Q3.  The question refers to the McKinsey Global Institute estimate that 
the U.S. gains 12 cents on every dollar of off-shoring. Doesn't it show 
that workers lose as a result?

A3. As noted earlier, trade creates winners and losers but can be 
expected to provide net positive gains to the U.S. The McKinsey study 
provided a pioneering effort to quantify both the gains and potential 
losses from this form of trade, facing up to both sides of the story, 
but concluding there are net gains to the U.S.
    The estimates made of cost savings of 65-70 percent were based on a 
very careful analysis, a series of company interviews and visits to 
Indian offshoring locations. Actual gains may vary depending on the 
activity being offshored and the skill with which the offshoring is 
carried out. Some companies may report smaller savings, as your 
question indicates. In addition, wages are rising rapidly in India for 
persons engaged in offshored work and the U.S. dollar is falling, so 
the cost savings may well be changing year by year.
    I note that if the cost gains are in fact smaller than McKinsey 
estimated, as small as 15 percent, then the amount of offshoring in the 
future will be very small. Dire predictions about massive impacts from 
offshoring are absurd if the costs gains are in fact so small.
    The McKinsey estimate of the losses to workers was deliberately 
chosen to emphasize potential problems, and in fact may be too high. It 
assumes that any activity involving service imports results in a 
displaced worker in the U.S. and that the employment experience of such 
workers matches that of ``displaced'' workers as studied by economists 
such as Lori Kletzer of the Peterson Institute.

        a.  In practice, some offshoring will not result in job losses, 
        as workers are deployed to other activities. For example, there 
        have been predictions that ATMs and offshoring would sharply 
        reduce jobs in banks. In practice, banks are finding it hard to 
        recruit enough people.

        b.  The turnover rate in U.S. call-center operations is 
        extremely high. A key to business success in U.S.-based call 
        centers is figuring out which potential hires will be willing 
        to stay more than three months. Many of the people leaving call 
        center jobs are leaving voluntarily.

        c.  Companies that offshore some activities can reduce costs, 
        become more competitive, and increase other employment in the 
        U.S.

        d.  The U.S. has had full employment for most of the past 
        twenty years; indeed it has had close-to-full employment since 
        1945. There is no overall shortage of jobs. The expansion of 
        international trade over the past sixty years has not adversely 
        affected the overall level of employment.

    That said: I agree that we need to be aware of the painful losses 
encountered by some workers as a result of job displacement, whether 
this displacement is caused by goods trade, service sector offshoring, 
technological change, or the rise and fall of different U.S. companies. 
As I said in my testimony, the U.S. has a very flexible labor market, 
with advantages that go with this, but it does not provide adequate 
security or training. In addition, workers need health insurance and 
pensions they can count on.

Q4.  Is the number of high-wage technology jobs below the BLS 
occupational projections?

A4. Data of this type is uncertain and projections are even more 
uncertain. As I said in my testimony, it appears that employment in 
basic programming jobs in the U.S. has been reduced by offshoring to 
India. Overall, technology employment is growing, but the technology 
industry has grown much more slowly since 1999 than was predicted 
before the technology bubble burst. This is primarily due to the slower 
growth of demand here in the U.S.

Q5.  Policies used by other countries to encourage innovation.

A5. Other countries have poured money into science and technology 
research and into venture capital funding. These efforts have made some 
difference but there have also been moneys wasted. Government efforts 
overseas to mimic the U.S. venture capital industry have not been very 
successful. Flagship technology projects such as the CERN accelerator 
or the space station may or may not be worth the money, but are 
unlikely to provide major benefits to commercial technology.
    Innovation is largely demand driven and occurs where there are 
flexible and competitive markets and customers that are looking for new 
products and services and are pressing for cost reductions. When 
combined with its remarkable strength in science and technology, the 
U.S. provides a wonderful cauldron for innovation.
    When locating R&D, companies look at the availability of a trained 
workforce and they locate where there customers are located. They want 
to locate where other companies locate their R&D and where there are 
strong universities. They consider the tax consequences of their 
decisions and the regulatory environment.

Q6.  Science and technology workers displaced.

A6. I have not studied this question specifically. My understanding is 
that in locations such as Silicon Valley workers whose companies go 
bankrupt can often find jobs with other companies in the same industry. 
However, in the technology crash in 2001, there were many workers who 
lost very high paid jobs and have not recovered from this.

Q7.  The surplus in services.

A7. Yes it is true that trade in services is hard to measure. Both 
imports and exports may be understated in the official data. Note, 
however, that BEA works hard to capture services trade. Recently, 
several people, including me, argued that BEA was understating service 
imports from India in comparison to data provided by the Indian group 
NASSCOM. BEA investigated this claim and found that NASSCOM was 
counting a lot of activity that was not in fact exported to the U.S. 
BEA defended its estimates very well.

    Response to Question 2 by Jacob Funk Kirkegaard of the Peterson 
Institute.

    The Bureau of Labor Statistics at the Occupational Employment 
Statistics, Frequently Asked Question #27 (http://www.bls.gov/oes/
oes_ques.htm#Ques27) lists several methodological 
considerations that may cause employment or wage comparisons of OES 
data over time to be less valid. The BLS lists seven different 
methodological concerns;

        1)  Changes in occupational classification;

        2)  Changes in industrial classification;

        3)  Changes in geographical classification;

        4)  Changes in the way the data are collected;

        5)  Changes in the survey reference period;

        6)  Changes in mean wage estimation methodology, and;

        7)  Permanent features of OES methodology.

    However, these methodological considerations are, for the following 
reasons, not of a magnitude that jeopardizes the conclusions drawn in 
this testimony;

        a.  Data Presented Covers Only Data For Occupations From the 
        Same Occupational Classification System--the 2000 SOC; Prior to 
        the data presented in Table 1, the OES survey used its own 
        occupational classification system through 1998. The 1999 OES 
        survey data provide estimates for all the occupations presented 
        in Table 1 in the 2000 Standard Occupational Classification 
        (SOC) system. Hence the data in Table 1 is not affected 
        directly from changes in ``1) Changes in occupational 
        classification.'' However, only in 2004 did the OES survey 
        estimate all ``residual categories'' and a small indirect 
        effect from different estimations of ``residual categories,'' 
        spread out over the period from 1999-2004 cannot be ruled out. 
        Yet, any such indirect effect is likely to be very small and 
        not materially affect the data presented in a systematically 
        biased manner.

        b.  Data Presented Unaffected By Four of Seven Methodological 
        Concerns; Given the national coverage of the data used, 
        immediately 2) and 3) are of no concern. As little if any 
        seasonal variation in the occupations used can be expected, 5) 
        is also less of a concern. Table 1 has no time comparison of 
        mean wages, and hence 6) is of no concern.

        c.  Data Presented Not Systematically Biased By Changes the Way 
        OEC Data is Collected; The BLS voices concern in 4) that ``In 
        the past, employment in some occupations in an industry may 
        have been reported in a residual category rather than in the 
        specific occupation.'' Given that all occupations presented in 
        Table 1 has been collected throughout the 1999-2006 period, it 
        is unlikely that this concern can lead to any systematic bias 
        in the results over the period.

        d.  Data Presented Compares a Seven-year Time Span and Is Thus 
        Less Affected By 7)'s Permanent OES Feature of Three-year 
        Rolling Averages; The OES data set at any given reference 
        period is a benchmark of six consecutive semi-annual panels and 
        hence represents a moving average of the entire U.S. economy. 
        Hence sudden changes in employment and wages will only show up 
        gradually. However, given the seven-year span of the 
        comparisons made in Table 1, the longer-term trend captured by 
        the comparisons should not be materially affected by this 
        feature.
                   Answers to Post-Hearing Questions
Responses by Ralph E. Gomory, President, Alfred P. Sloan Foundation

Questions submitted by Chairman Bart Gordon

Q1.  In one of your remarks you seemed to imply that there is no 
shortage of American scientists and engineers. This is important as 
much thought has gone into recommendations to increase the supply of 
U.S. scientists and engineers. Please give us your opinion on this 
subject.

A1. You have correctly interpreted my remarks. There is little or no 
evidence of any shortage of scientists and engineers.
    The House Science and Technology Committee should be especially 
aware of this possibility since it already has had the embarrassing 
duty of investigating false claims of shortages that it had accepted in 
the past. For a good historical survey of present and past shortages 
claims, including the role played by this committee, I am attaching an 
article by the well known demographer Michael Teitelbaum who heads the 
Sloan Foundation program in this area. For further discussion of this 
set of issues I suggest the well known labor economist Richard Freeman 
of Harvard who has spent a number or years heading a project on the 
Science and Engineering workforce.

Q2.  Could you explain how your view of the economic theory and 
implications of globalization differs from Dr. Blinder and from Dr. 
Baily?

A2. On theory I am not sure that Alan Blinder and I are terribly 
different. He says that according to his view there can be a huge 
negative impact on the U.S. from globalization and the benefits will be 
so long in coming that they may not matter. He thinks that new areas 
will eventually be found to replace the huge array of industries and 
services that will be lost but thus may take decades. I don't see in 
any of the standard theory any indication that there will be a 
resurgence after the terrible loss. Nor do I from my long exposure to 
industry think that it is likely that we can replace the loss of so 
much of our services and production with equally remunerative and 
productive employment. Our differences however are about the distant 
future.
    Martin Bailey doesn't see that there is an overall problem at all. 
In addition he uses the terms globalization and free trade 
interchangeably. There is no basis for saying this as can be shown by 
the simplest examples. See for example my testimony which shows the 
difference between free trade and globalization in the most standard 
economic model, the standard England-Portugal Textiles-Wine example. 
And the difference is of the utmost importance, free trade will benefit 
us, globalization will almost certainly hurt. (See my written 
testimony.)

Q3.  What is your opinion on free trade?

A3. I am an advocate of free trade. However I am aware, as most people 
are not, that economic theory points to the fact that the home country 
may be worse off trading in a free trade environment with a trading 
partner that has become more developed than when it was trading with 
that trading partner when it was less developed. In our case that 
trading partner is Asia. Therefore I point out very clearly in my 
written testimony that under globalization, which includes the 
development of many Asian industries and services, we can be worse off 
than before, not because of free trade, but because of the emergence 
and development of many rival industries in Asia that were not there 
before. I point out clearly that not having free trade is worse yet, 
and that the only real path to retaining prosperity is increased 
productivity in the U.S., and that will not be obtained through 
tariffs. I advocate a productivity focus as a response to the 
industrial development in Asia.

Q4.  You express concern about the long run impacts on the U.S. 
economy, but aren't these the same things that were said about Japan, 
and we've done just fine with Japan?

A4. I am not at all sure what is meant by the statement ``we have done 
just fine with Japan'' I am not aware of any analysis that can show 
with all the other nations in the world interacting and growing that we 
have done either fine or not fine with Japan. Certainly we have lost 
major shares of electronics, computers, steel, etc., to Japan and 
Taiwan. These losses have both a beneficial and a negative effect and I 
am not sure how anyone can sort that out and untangle that from the 
effect of just plain technological progress.
    More importantly I don't quite understand how ``things that were 
said about Japan'' even if they were not correct bear on the present. 
The effect of Japan was on manufacturing and one result is that we have 
today a smaller manufacturing sector as a proportion of our economy 
than do Germany or Japan. Is this good? People will argue about that 
but the Science and Technology Committee should be award that is where 
most R&D is.
    However the challenge today is not from a small country with a 
limited labor force specializing successfully in a few industries, but 
from populations that dwarf ours and an across the board approach that 
leaves no room for escape. Furthermore the progress of communication 
technology has made services contestable as well as manufactured goods. 
The developing Asia of today is certainly not the developing Japan of 
the 1970's and 1980's and that difference shows up if one analyzes the 
standard trade models as well as uses common sense.



                   Answers to Post-Hearing Questions
Responses by Thomas J. Duesterberg, President and CEO, Manufacturers 
        Alliance/MAPI

Questions submitted by Chairman Bart Gordon

Q1.  Dr. Gomory says that multinational company interests are not 
always aligned with America's. Do you agree with his assessment? In 
which areas do you believe he is correct?

A1. This is a very broad question which can only be partially answered. 
Dr. Gomory's argument largely turns on his analysis that productivity-
enhancing activities are increasingly being sent offshore by U.S. 
firms, so that the mutual benefits of trade are reduced in favor of 
non-U.S. operations. I generally do not agree with his assessment for 
several reasons. First, as I demonstrated in my testimony, productivity 
in the United States, especially in the globally engaged manufacturing 
sector, has done very well in recent decades, and especially since 
1995. In terms of its relative performance, the United States has 
gained against most global competitors in terms of productivity in this 
period.\1\ Second, the large majority of research and development 
activities by U.S. firms, especially those related to cutting-edge new 
products or processes, are still performed in the United States. 
However one measures national performance, per capita income, national 
wealth, relative market shares, relative purchasing power, or raw GDP, 
the United States is continuing to advance in both absolute and 
relative terms. I also argued in my testimony that it is in the 
interest of U.S. firms to be active in foreign markets due to the 
superior growth prospects in areas such as China and India and listed a 
variety of ways in which such participation strengthens U.S. firms--and 
hence our domestic economy. The one area where we do need to be 
vigilant, which I emphasized in my oral testimony and in response to 
questions, is in industries and products related to national defense. 
The national interest in maintaining superiority in defense-related 
industries and products clearly must be carefully aligned with the 
interests of U.S. firms in gaining world market share. We have 
sufficient policies in place to accomplish this balancing act, but they 
are in constant need of updating to reflect changing global 
distribution of capabilities.
---------------------------------------------------------------------------
    \1\ See Krzysztof Bledowski, Industrial Performance of Europe 
Versus America: Trends in Labor, Productivity, and Costs, Manufacturers 
Alliance/MAPI, ER-635e, July 2007.

Q2.  A recent BusinessWeek cover story says that the real costs of 
offshoring are being under-counted, and that domestic production has 
been overstated. How does this finding affect the figures in your 
---------------------------------------------------------------------------
testimony?

A2. In response to this question, I offer as an attachment a recent 
paper by my colleague Jeremy Leonard addressing the BusinessWeek 
analysis. At this point, not enough work has been done to cause us to 
think that the data used in my testimony can and should be revised.

Q3.  What share of the millions of American manufacturing jobs lost 
over the past seven years has been due to offshoring? What share was 
due to other causes?

A3. Little, if any data exist to accurately address this offshoring 
question. The Bureau of Labor Statistics maintains a Mass Layoff series 
whereby closings and layoffs of 50 or more from business establishments 
that employ 50 or more workers are identified with the use of 
administrative data. Employer interviews are conducted to identify 
events that last more than 30 days and to supplement administrative 
data with information on the nature of the layoff itself, including the 
reason for the separation.
    Beginning in January 2004 the BLS, motivated by growing interest in 
the outsourcing issue, added two questions to the employer interview 
component:

        1.  Did this layoff include your company moving work from this 
        location(s) to a different geographic location(s) within your 
        company?

        2.  Did this layoff include your company moving work that was 
        performed in-house by your employees to a different company 
        through contractual arrangements?

    If employers responded ``yes'' to either question, then they were 
asked ``Is this location inside or outside the United States?'' and 
``How many layoffs were a result of this relocation?'' ``Offshoring'' 
is indicated by movement of work out of the United States, while 
``outsourcing'' the movement of work that was conducted in-house to a 
different company which may be inside or outside the United States.
    As shown in Figure 1, the share of mass layoff events and 
separations in the U.S. manufacturing sector that has been accompanied 
by movement of work overseas has been below 10 percent since the series 
was initiated in 2004. (These data are not seasonally adjusted and thus 
we use first quarter data from each year to display the trend.) The 
first quarter 2007 shares are well below those seen in 2004, with the 
events share falling more than the separation share. BLS cautions that 
these data represent a new series, that many employers refuse to answer 
the questions or do not know if layoffs were associated with 
outsourcing, and thus are subject to major refinement in coming years.




    Data related to the services sector show even fewer reports of mass 
layoffs accompanied by movement of work outside the United States. 
Between 1.6 percent and 1.4 percent of such services sector layoffs 
meet this criterion.
    The data generated by these new questions, and by the Mass Layoff 
survey in general, have, at best, a limited use. For one thing, mass 
layoffs are only a subset of the larger job loss picture. Further, 
these data do not reflect the trend in hiring, which many analysts 
believe to be a more critical component of the manufacturing job 
dynamic since 2000. Nor do they reflect jobs not created in the United 
States due to growth of market share by foreign firms. But, more 
importantly, conceptual problems prohibit the use of any data to make 
precise inferences about the substitution of a foreign for a domestic 
job. A March 2004 study prepared by an analyst at the Bureau of 
Economic Analysis clearly explains the issues as they pertain to U.S. 
multinationals, which have a large footprint in the U.S. manufacturing 
sector.\2\ As noted in the Meckstroth paper cited in MAPI's June 12 
testimony, U.S. parent multinationals (MNC) account for 55 percent of 
all employment by U.S. manufacturing firms and about 70 percent of U.S. 
manufacturing value-added. The article notes that while BEA's data on 
the operations of U.S. MNCs indicate a relatively stable mix of 
domestic and foreign operations, the inferences that can be drawn from 
these data about production strategies and the ultimate impact of 
multinational activity on the U.S. and foreign economies are limited. 
The U.S. parent share of U.S. MNC activity can change for a number of 
reasons and these changes do not uniformly correspond to either 
additions or subtractions from production and employment in the United 
States. Specifically, the impact of new direct investment abroad by 
U.S. MNCs will vary depending on the form of the investment and the 
reason it was undertaken. Affiliate employment will always rise 
regardless of whether the form of the direct investment is a Greenfield 
plant (i.e., built from the ground up), the acquisition of a successful 
existing enterprise, or the acquisition of a failed enterprise. But the 
impact on host country employment will differ. And the host country 
impact is not simply a function of MNC operations alone. It is 
determined by a wide range of macroeconomic factors that include the 
total level of employment. Many studies show that in the United States, 
in the aggregate, growth in foreign affiliated employment is generally 
accompanied by growth in domestic employment.
---------------------------------------------------------------------------
    \2\ See Raymond J. Mataloni, Jr., ``A Note on Patterns of 
Production and Employment by U.S. Multinational Companies,'' Survey of 
Current Business, March 2004, pp. 52-56.
---------------------------------------------------------------------------
    A consideration of the reasons for the direct investment by the 
U.S. MNC is instructive. Affiliate employment shares will rise 
regardless of whether the direct investment is a result of the shifting 
of production from parents to affiliates or because of the opening of 
new overseas markets that can only be serviced through a local 
enterprise. In the case of production shifting, the rise in employment 
might come partially or totally at the expense of parent employment. 
If, on the other hand, overseas markets are generating new affiliate 
activity, domestic U.S. employment might rise because of the need to 
provide new headquarter services. Further, many other factors might be 
associated with a change in the parent and affiliate shares of MNC 
activity. These include different rates of productivity growth in U.S. 
parents and affiliates and changes in foreign government policies 
toward direct investment.
    Finally, the article notes a significant data limitation in 
tracking employment changes in U.S. parents and affiliates. Except for 
the data (collected during benchmark study years) on the number of 
production workers of foreign affiliates in manufacturing, BEA does not 
collect data on the types of jobs held by employees of either U.S. 
parents or foreign affiliates. Consequently, it is not possible to 
determine the relative changes in the types of jobs offered by parents 
and affiliates either in terms of the occupation or the skill set 
required for the job. On top of the above-discussed market complexities 
of domestic and foreign job changes, this data limitation prevents any 
inference at all about the substitution of foreign for domestic jobs.
    From a policy point of view, an understanding of the forces that 
have been impacting manufacturing employment is more valuable than 
estimates regarding the precise impact of offshoring on domestic 
employment, which is murky at best. In a 2004 paper, Kristin Forbes, 
currently an Associate Professor at MIT's Sloan School of Management 
and formerly a member of President Bush's Council of Economic Advisers, 
discussed a number of the forces that catalyzed the large manufacturing 
job loss that occurred between 2001 and 2004.\3\ The unusual character 
of the 2000-2001 recession and subsequent period of slow growth needs 
to be understood to appreciate the reasons for the severe factory job 
losses. As measured by the decline in real GDP, the recession was quite 
mild by historical standards. But business investment and exports, the 
two primary demand generators for U.S. manufactured products, suffered 
disproportionately. The significant business investment decline came on 
the heels of what many economists still view as an investment bubble 
that reached a peak in the latter years of the 1990s. The sizable 
export decline was, in large measure, due to stubbornly persistent 
growth difficulties in the Eurozone and Japan.
---------------------------------------------------------------------------
    \3\ Kristin J. Forbes, ``U.S. Manufacturing: Challenges and 
Recommendations,'' Business Economics, Vol. 39. No. 3, pp. 30-37.
---------------------------------------------------------------------------
    But on top of these short-term issues, Forbes discusses the long-
term improvement in manufacturing productivity growth accompanied by 
the very long-term decline of manufacturing employment. She notes that 
during the second half of the 20th century, manufacturing productivity 
growth has been stronger than for the economy as a whole. And, very 
strikingly, the manufacturing share of total employment actually peaked 
in the early 1940s. As noted in MAPI's testimony, the very long-term 
nature of the manufacturing employment decline suggests that the 
reasons are fundamental to the factory sector's evolution and not 
simply a result of the current challenges presented by emerging 
markets, a point that is accentuated by the fact that many of the 
challenges facing U.S. manufacturers are not unique to the United 
States. Other large economies such as Japan and China also suffered 
large manufacturing job losses in the early years of the 21st century.

Q4.  Do we need policies to keep R&D in the U.S.? If so, why?

A4. I don't believe the United States needs any new policies to keep 
R&D in the country, but existing ones can and should be strengthened. 
This is especially the case since R&D is currently the least globalized 
activity of multinationals, as less than 14 percent of R&D is conducted 
by foreign affiliates, up very modestly from 11.4 percent in 1990. 
First, the research and experimentation tax credit should be simplified 
and made permanent. Second, the current high (relative to most 
internationally competitive economies) corporate tax rate discourages 
the capital investment needed for commercializing R&D, and, in some 
cases, discourages location in the United States. The corporate tax 
rate should be lowered to provide a level playing field for U.S. firms. 
Third, federally funded basic research in the physical sciences and 
engineering has languished, in relative and absolute terms, in recent 
decades. This class of research is important to manufacturers and needs 
to be increased. Fourth, the education system that supplies trained and 
creative talent to conduct cutting-edge R&D needs to be improved, and 
creative ways to enhance the career paths of aspiring scientists and 
engineers need to be conceived and put into place. Fifth, the legal 
regime (both domestic and international, through the World Trade 
Organization) which encourages and protects intellectual property, 
needs to be strengthened and updated. It is, finally, worth noting that 
we need to allow our global corporations to capture the positive 
benefits of emerging innovation clusters around the world, which may 
require some local investment. Likewise, some local R&D presence may 
aid in adapting products to local markets. There is no reason that 
positive spillover impacts, which are well documented in the research 
literature, could not arise from overseas universities and industrial 
research clusters as well as those in the United States. Such 
spillovers, too, could strengthen domestic U. S. firms.



                              Appendix 2:

                              ----------                              


                   Additional Material for the Record

















   THE GLOBALIZATION OF R&D AND INNOVATION, PART II: THE UNIVERSITY 
                                RESPONSE

                              ----------                              


                        THURSDAY, JULY 26, 2007

                  House of Representatives,
                       Committee on Science and Technology,
                                                    Washington, DC.

    The Committee met, pursuant to call, at 10:05 a.m., in Room 
2318 of the Rayburn House Office Building, Hon. Brian Baird 
[Acting Chairman of the Committee] presiding.



                            hearing charter

                  COMMITTEE ON SCIENCE AND TECHNOLOGY

                     U.S. HOUSE OF REPRESENTATIVES

                      The Globalization of R&D and

                          Innovation, Part II:

                        The University Response

                        thursday, july 26, 2007
                         10:00 a.m.-12:00 p.m.
                   2318 rayburn house office building

1. Purpose

    On Thursday, July 26, 2007, the Committee on Science and Technology 
will hold a hearing to consider how globalization affects America's 
universities, and its implications for the U.S. science and engineering 
enterprise. The U.S. higher education system is a principal source of 
America's preeminence in science, technology, engineering, and 
mathematics (STEM) fields. As STEM offshoring increases competition for 
U.S. STEM workers, universities are responding by modifying their 
curricula to help their STEM students better compete. Globalization 
also enables American universities to venture abroad--to build programs 
and campuses overseas to serve the growing demand of foreign STEM 
students. This hearing will explore the globalization and 
internationalization of American universities and the implications for 
America's competitiveness.

2. Witnesses

Dr. David J. Skorton is President of Cornell University.

Dr. Gary Schuster is Provost and Vice President for Academic Affairs of 
Georgia Institute of Technology.

Mr. Mark Wessel is Dean of the H. John Heinz III School of Public 
Policy and Management at Carnegie Mellon University.

Dr. Philip Altbach is the Director of the Center for International 
Higher Education and the J. Donald Monan SJ Professor of Higher 
Education at Boston College.

3. Brief Overview

          Enrollments in some STEM fields, particularly 
        computer sciences, are down significantly over the past few 
        years in part because students believe these jobs are 
        vulnerable to offshoring. In response, universities are 
        modifying STEM curricula in order to give their students an 
        advantage over emerging competitors from low-cost countries. 
        Some curricular strategies include: substituting technical 
        classes with business ones; offering interdisciplinary 
        technical degree programs such as bio-engineering with 
        electrical engineering; and, providing international exposure 
        to technical students such as study abroad, foreign language 
        trainings, and collaborative projects with students in other 
        countries.

          According to the American Council on Education (ACE) 
        approximately one percent of American students participate in 
        study abroad programs. For engineering students the number is 
        even smaller, so some engineering colleges are encouraging more 
        of their students to participate in international experiences. 
        Rensselaer Polytechnic Institute (RPI) has set a goal to send 
        25 percent of its 2010 class overseas through partnerships with 
        universities around the world.

          America's higher education is considered the best in 
        the world. The Economist reports that America has seventeen of 
        the top twenty universities and employs 70 percent of the 
        world's Nobel prize-winners. American academics also produce 30 
        percent of the world's peer-reviewed scientific and technical 
        journal articles, according to the National Science 
        Foundation's (NSF) Science and Engineering Indicators 2006.

          American universities have traditionally attracted 
        large numbers of foreign students, particularly advanced degree 
        STEM students. Now, some American universities are taking their 
        education to foreign students by building campuses and offering 
        STEM degree programs in other countries. While there are no 
        definitive counts of foreign campuses and programs established 
        by American universities, experts believe that more 
        universities, particularly high-prestige ones, are venturing 
        abroad. The World Bank estimates that 150 of the 700 foreign 
        degree programs operating in China are American.

          The American Council on Education (ACE) identifies 
        eight different drivers of the internationalization of American 
        universities, including: increasing revenue, enhancing 
        prestige, enhancing international research collaborations, 
        serving rapidly growing demand from China and India, and 
        enhancing study abroad opportunities for U.S. students.

4. Issues and Concerns

What factors lead universities to establish branch campuses overseas 
and how widespread is this trend? What are the benefits and costs of 
this trend to the U.S. national interest in maintaining an edge in 
international economic competitiveness--and to overall U.S. national 
interests?

    Experts predict that the number of foreign campuses and degree 
programs operated by American universities will increase significantly 
in the near future. The goals of these operations include increasing 
revenue, enhancing prestige, serving rapidly growing demand from China 
and India, and enhancing study abroad opportunities for U.S. students. 
The World Bank estimates that 150 of the 700 foreign degree programs in 
China are from American universities.

Do STEM educational programs offered at foreign campuses slow down or 
speed up the offshoring of STEM jobs? Are we exporting one of the 
principal sources of our comparative advantage? Are we training 
American workers' competitors?

    The burgeoning demand for quality STEM education in India and China 
is driven in part by the rise of offshoring technology work to India 
and manufacturing work to China.

As U.S. STEM workers increasingly compete directly with workers based 
in low-cost countries, much of their competitive advantage will come 
from superior education. Have U.S. universities made curricular changes 
to give U.S. STEM students a durable advantage? Are the changes common 
across most U.S. universities and are they effective?

    Some STEM programs are substituting technical classes like computer 
science with business classes such as project management. Other 
programs are combining technical disciplines like biomedical 
engineering with electrical engineering to create interdisciplinary 
graduates.

How do foreign educational programs and campuses affect the flow of 
foreign graduate students to American universities?

    If foreign students are able to get the same degree in their home 
countries for less money, they may forgo studying in the U.S. On the 
other hand, foreign campuses may expand the pool of students seeking 
graduate degrees in the U.S.

5. Background

    The U.S. higher education system is a principal source of America's 
preeminence in science, technology, engineering, and mathematics (STEM) 
fields. The Economist reports that America's higher education is the 
best in the world, home to seventeen of the top 20 universities and 70 
percent of the world's Nobel prize-winners. The National Science Board 
reports that American academics produce 30 percent of the world's 
science and engineering articles. But globalization is re-shaping how 
and where STEM work is done, and American universities are adapting to 
globalization and offshoring by internationalizing STEM curricula and 
by increasing their global footprint.
    American STEM students face increased competition and career 
vulnerability in the wake of offshoring and globalization. As a result, 
U.S. students are shying away from STEM fields they deem vulnerable to 
offshoring. The most prominent example is computer science, where 
undergraduate enrollments are down 40 percent over the past four years. 
Universities are responding to those concerns by modifying their STEM 
curricula and offering more international exposure for their U.S. 
students.
    To make their students more desirable in the job market, 
engineering colleges are providing more international experience for 
them. Currently, engineering students participate in study abroad 
programs in disproportionately small numbers, so a number of 
engineering colleges have set goals to increase these numbers. About 
half of Worcester Polytechnic Institute's (WPI) graduating class goes 
overseas in some capacity. And through partnerships with universities 
around the world, Rensselaer Polytechnic Institute (RPI) has set a goal 
to have 25 percent of its 2010 class study or travel abroad. Other 
universities, like the University of Rhode Island, are approaching 
internationalization of STEM education by emphasizing foreign language 
training. Still others, like Purdue University, match up its students 
with students in other countries on international design teams.
    American universities are also seeking to increase their global 
presence by venturing abroad--building campuses and STEM degree 
programs overseas. American universities have traditionally attracted 
large numbers of foreign students, particularly in STEM fields at the 
graduate level. Now, American universities are taking their education 
to foreign students by building campuses and offering STEM degree 
programs in other countries. Some, like Cornell, already identify 
themselves as ``transnational universities.''
    As part of its strategic plan to increase its global footprint 
Carnegie-Mellon has established programs in Greece, Japan, Taiwan, 
South Korea, Australia and India. Georgia Tech is building a campus in 
Andhra Pradesh, India, to offer Master's and Ph.D. degree programs. And 
Cornell University operates a medical school in Qatar.
    Offshoring is giving high quality foreign students job 
opportunities in their home countries they never had before, making it 
less desirable to come to the U.S. to study. As a result prominent 
universities are expanding their global footprints, to tap a more 
geographically diffuse student pool especially in India and China.
    While there are no definitive counts of foreign campuses and 
programs established by American universities, experts believe that 
more universities, particularly high-prestige ones, are venturing 
abroad. And the World Bank estimates that 150 of the 700 foreign degree 
programs operating in China are American. ACE identifies eight 
different drivers of the internationalization of American universities. 
Some of these include: increasing revenue, enhancing prestige, 
enhancing international research collaborations, exponential growth in 
demand in emerging economies of China and India, and enhancing study 
abroad opportunities for U.S. students.
    The hearing will explore the trends, motivations, and consequences 
of the globalization of American universities on the U.S. science and 
engineering enterprise.
    Mr. Baird. [Presiding] I call the Committee to order, and 
welcome everyone to this morning's hearing on globalization of 
American universities and the impact on national 
competitiveness.
    I want to offer welcomes to our distinguished witnesses, 
all leaders and experts on the emerging trend of university 
globalization, and we look forward to hearing your thoughts on 
the globalization of universities and the implications for 
American competitiveness.
    Chairman Gordon, did you want to offer some comments? I 
know you have to leave early. Did you want to offer some 
comments before I offer my introductory remarks?
    Chairman Gordon. Thank you, Mr. Chairman, and I thank you 
for continuing this. As you know, this is a very important 
issue to us. We have been working on this in a bipartisan way 
for the last few years. I am very hopeful that we are close to 
an agreement with the Senate on our Competitiveness Bill. I 
know that you are very aware of the Rising Above the Gathering 
Storm, and I think we are going to be able to get that done. I 
hope that you will soon see the results of it, and may come 
back and visit us in a year or so, to let us know how it is 
working, and how to fine-tune it, and how we need to move 
beyond that.
    Today is also going to be a very interesting hearing 
concerning STEM education. As we know, just to get a STEM 
education these days, even from a substantial university, like 
we have here today, is no guarantee of a lifetime of good 
employment. And so we want to learn more about that. We want to 
learn what you are learning from overseas, and maybe lessons 
that can be brought home to us.
    So, again, we thank you for being here, and as Chairman 
Baird said, I have a markup shortly, and I will have to leave, 
but I will be staying in touch, and want to learn more about 
what you have to say. So thank you.
    [The prepared statement of Chairman Gordon follows:]
               Prepared Statement of Chairman Bart Gordon
    I would like to thank the witnesses for appearing at today's 
important hearing on the university response to the globalization of 
R&D.
    The Science and Technology Committee has been a leader in creating 
policies that strengthen science, technology, engineering, and 
mathematics education in the United States. The institutions 
represented on this panel are key contributors to our country's 
preeminent STEM education enterprise.
    However, as they know all too well, having a STEM degree, even from 
a top school, no longer guarantees lifelong employment in a well-paying 
job in the United States. Our students are increasingly competing with 
well-trained, low cost employees in countries such as India and China.
    Universities are our first line of defense in ensuring our 
leadership in the global economy by giving our scientists and engineers 
the special skills they need to set themselves apart from the global 
competition. I am eager to hear about the new efforts you are 
undertaking to prepare students for the 21st century economy.
    I also am curious to learn more about international programs being 
established by American universities to educate foreign students in 
their home countries.
    While opportunities for international exchange are a key part of 
improving curriculum, I am eager to hear what the motivations were for 
your universities to establish campuses offshore, what sorts of 
opportunities and challenges you are now facing, and what effects you 
anticipate in the years to come.

    Mr. Baird. Thank you, Mr. Chairman. Mr. Gordon, as you all 
know, has been just fantastic working here along with Ranking 
Member Hall and Mr. Ehlers and others on both sides, in a 
bipartisan way, on expanding STEM education in a host of 
important ways, and we are grateful for your participation.
    As you all know, corporations have been globalizing for 
decades, and we know the effects on U.S. competitiveness are 
complex, including positives, such as lower prices for 
consumers, but also, some negatives, as job and wage loss have 
impacted other American workers.
    But we know relatively little about how university 
globalization will impact America's competitiveness. America's 
higher education system is a principal source of our 
preeminence in science, technology, engineering, and math 
fields, so-called STEM fields, and as The Economist reports, 
U.S. higher education is the best in the world, home to 17 of 
the top 20 universities and 70 percent of the world's Nobel 
Prize winners. I think we swept those prizes last year, in 
fact. The National Science Board reports that American 
academics produce 30 percent of the world's science and 
engineering articles.
    However, off shoring is reshaping how and where STEM 
education work is done. As a result, international competition 
has shifted increasingly to the individual worker level, and 
multinational companies are responding to competition by using 
more workers in lower cost countries. Those companies' American 
workforce now compete against workers in low cost nations like 
China and India.
    American workers must respond by either increasing their 
productivity or lowering their wages. Obviously, the only 
acceptable solution is for our workers to increase 
productivity, but this is becoming more difficult as a larger 
share of jobs become vulnerable to offshoring, and many of 
workers' traditional advantages, infrastructure, better tools 
and technology, proximity to largest consumer market, are also 
being eroded.
    Therefore, our higher education system will become an even 
more critical factor in helping American workers differentiate 
themselves from workers in lower cost countries. At the same 
time, American universities are beginning to globalize in new 
ways, which we will hear about today. With many more jobs 
requiring international work teams, universities are preparing 
their STEM students by providing more international experience 
through study abroad and other cross-border collaborations.
    Universities are also modifying their STEM curricula to 
better prepare students for jobs that will stay in America. In 
some respects, American universities have been global for many, 
many years. We have attracted large numbers of foreign 
students, particularly in STEM fields, at the graduate level, 
but offshoring is giving high quality foreign students 
outstanding job opportunities in their home countries. This may 
make it less likely that foreign students will stay in the U.S. 
after graduation, and may make it less desirable to come to the 
U.S. to study in the first place.
    Therefore, American universities are taking their education 
to the foreign students by building campuses and offering STEM 
degree programs in other countries. Today, we will hear what 
our witnesses have to say about the trends, motivations, and 
consequences of globalization of universities on our U.S. 
science and engineering enterprise, its workforce, and our 
nation's competitiveness.
    With that, I would like to now recognize my friend and 
colleague, the Ranking Member, Mr. Hall from Texas, for an 
opening statement.
    [The prepared statement of Chairman Baird follows:]
               Prepared Statement of Chairman Brian Baird
    I want to welcome everyone to this morning's hearing on the 
globalization of American universities and its impact on national 
competitiveness. I want to offer welcomes to our distinguished 
witnesses--all leaders and experts on the emerging trend of university 
globalization.
    We look forward to hearing your thoughts on the globalization of 
universities and its implications for America's competitiveness.
    Corporations have been globalizing for decades. And we know its 
effects on U.S. competitiveness are complex, including positives such 
as lower prices for consumers as well as negatives such as job and wage 
loss for some American workers. But we know very little about how 
university globalization will impact America's competitiveness.
    America's higher education system is a principal source of 
America's preeminence in science, technology, engineering, and 
mathematics (STEM) fields. The Economist reports that U.S. higher 
education is the best in the world, home to seventeen of the top twenty 
universities and 70 percent of the world's Nobel prizewinners. The 
National Science Board reports that American academics produce 30 
percent of the world's science and engineering articles.
    But offshoring is reshaping how and where STEM work is done. As a 
result, international competition has shifted increasingly to the 
individual worker level. Multinational companies are responding to 
international competition by using more workers in lower-cost 
countries. Those companies' American workforce now competes against 
workers in low cost countries like China and India.
    American workers must respond by either increasing their 
productivity or lowering their wages. Obviously, the only acceptable 
solution is for our workers to increase their productivity. But this is 
becoming more difficult as a larger share of jobs become vulnerable to 
offshoring. And many of our workers' traditional advantages--better 
infrastructure, better tools and technologies, and proximity to the 
largest consumer market--are being eroded. Therefore, our higher 
education system will become an even more critical factor in helping 
American workers differentiate themselves from workers in low cost 
countries.
    At the same time American universities are beginning to globalize 
in new ways. With many more jobs requiring international work teams, 
universities are preparing their STEM students by providing more 
international experience through study abroad and other cross-border 
collaborations. And universities are modifying their STEM curricula to 
better prepare their students for the jobs that will stay in America.
    In some respects American universities have been global for many 
years. They have attracted large numbers of foreign students, 
particularly in STEM fields at the graduate level. But offshoring is 
giving high quality foreign students outstanding job opportunities in 
their home countries. This may make it less likely that foreign 
students will stay in the U.S. after graduation, and may make it less 
desirable to come to the U.S. to study in the first place. So, American 
universities are taking their education to foreign students by building 
campuses and offering STEM degree programs in other countries.
    We look forward to hearing what our witnesses have to say about the 
trends, motivations, and consequences of the globalization of 
universities on the U.S. science and engineering enterprise, its 
workforce, and America's competitiveness.

    Mr. Hall. Mr. Chairman, thank you very much.
    You have covered it very well, and I am amazed at the 
gentlemen we have before us here, their background, their 
ability, and their willingness to give. I certainly know that 
there is no doubt that the American higher education system is 
one of our nation's crown jewels, and an increasing demand for 
U.S. degrees and escalating use of our higher education system 
as a model by other countries reflects decades of hard work and 
investment by the American people and by dedicated 
professionals, like you four men on the panel and others that 
will be before us.
    While congratulations are in order, I think we should take 
care not to rest on our laurels, while the world around us 
continues to invest and improve their research and educational 
facilities.
    Today, I look forward to discussing one way in which U.S. 
institutions of higher education are trying to continue their 
record of leadership. Scores of universities are now looking 
overseas for opportunities to expand. Many have partnered with 
foreign universities to offer joint programs and degrees, while 
others have opened new branches, complete with classrooms, 
laboratory space, and dormitories. Some universities offer a 
limited curriculum overseas, and require students to complete 
their training in the U.S., while others offer complete degree 
programs abroad.
    This wide range of models makes it difficult, I think, to 
confidently predict how the globalization of higher education 
might affect U.S. institutions and the U.S. economy overall. 
However, we have a panel before us today that can help us map 
out the pros and cons of these trends.
    In addition to the schools represented here today, I would 
like to take a moment to mention the work of Texas A&M in some 
faraway areas. I think that it is highlighted in the American 
Council of Education report, Venturing Abroad: Delivering U.S. 
Degrees Through Overseas Branch Campuses and Programs. Starting 
under the presidency of Secretary of Defense Robert Gates, 
Texas A&M continues to build a substantial engineering program 
in these areas. The inaugural class began in September of 2003, 
with 29 students, and has grown from there. Currently, Texas 
A&M offers four engineering degrees in this one area, in one 
location, with a faculty of 52 and student body of 200.
    This course work meets the same standards of those in 
College Station, including a course on Texas history. I hope he 
leaves out the part that Sam Houston had to burn the bridge to 
be assured that his folks wouldn't abandon him until the battle 
was over, and had to tell them there was no retreat. That is 
kind of embarrassing, as I look back on it, but there, and I 
have had a lot of people, Tennesseans and folks from Kentucky 
really saved Texas. Really, but for them, there wouldn't be any 
Texas, and the answer, I think, that Chairman Barton gave to 
me, well, there wouldn't be a Texas anyway if the Alamo had had 
a backdoor in it, so I don't know if that is so or not, but we 
are going to stand up for Texas.
    There are a few questions that I am eager to have addressed 
today. First of all, who are the students that take advantage 
of U.S. programs abroad, and where do they go after graduation? 
Do significant numbers work for American firms after 
graduation, either in their home country, or in the U.S.? Do 
more U.S. students abroad study abroad when branch campuses are 
available?
    Next, I am interested in our panel's thoughts on the 
ability of their international efforts to serve as centers for 
business development. Do these centers provide a foot in the 
door for U.S. businesses, or do they largely stimulate growth 
only within the foreign country?
    Finally, I think we should also consider the role these 
international arrangements have in further projecting America's 
image. Many of these programs are located in areas of the world 
where the U.S. has a strategic interest in being on the ground. 
These are some questions that I think probably you will answer, 
and I look forward to hearing them. I do look forward to your 
testimony, for the opportunity to continue this discussion 
during the questioning.
    And Mr. Chairman, I yield back.
    [The prepared statement of Mr. Hall follows:]
           Prepared Statement of Representative Ralph M. Hall
    Mr. Chairman, there is no doubt that the American higher education 
system is one of our nation's crown jewels. An increasing demand for 
U.S. degrees and an escalating use of our higher education system as a 
model by other countries reflect decades of hard work and investment by 
the American people and by dedicated professionals like those on the 
panel before us. While congratulations are in order, we should take 
care not to rest on our laurels while the world around us continues to 
invest and improve their research and educational facilities.
    Today I look forward to discussing one way in which U.S. 
institutions of higher education are trying to continue their record of 
leadership. Scores of universities are now looking overseas for 
opportunities to expand. Many have partnered with foreign universities 
to offer joint programs and degrees while others have opened new 
branches complete with classrooms, laboratory space, and dormitories. 
Some universities offer a limited curriculum overseas and require 
students to complete their training in the U.S. while others offer 
complete degree programs abroad. This wide range of models makes it 
difficult to confidently predict how the globalization of higher 
education may affect U.S. institutions and the U.S. economy overall. 
However, we have a panel before us today that can help us map out the 
pros and cons of these trends.
    In addition to the schools represented here today, I would like to 
take a moment to mention the work of Texas A&M in Qatar, which is 
highlighted in the American Council of Education (ACE) report, 
Venturing Abroad: Delivering U.S. Degrees through Overseas Branch 
Campuses and Programs. Started under the presidency of Secretary of 
Defense Robert Gates, Texas A&M continues to build a substantial 
engineering program in Qatar. The inaugural class began in September, 
2003, with twenty-nine students and has grown from there. Currently, 
Texas A&M offers four engineering degrees in Qatar, with a faculty of 
fifty-two, and student body of two hundred. The course work in Qatar 
meets the same standards of those in College Station, including a 
course on Texas history, I might add.
    There are a few key questions that I am eager to have addressed 
today. First of all, who are the students that take advantage of U.S. 
programs abroad and where to they go after graduation? Do significant 
numbers work for American firms after graduation, either in their home 
country or in the U.S.? Do more U.S. students study abroad when branch 
campuses are available? Next, I'm interested in our panel's thoughts on 
the ability of their international efforts to serve as centers for 
business development. Do these centers provide a foot in the door for 
U.S. businesses, or do they largely stimulate growth only within the 
foreign country? Finally, I think we should also consider the role 
these international arrangements have in further projecting America's 
soft power. Many of these programs are located in areas of the world 
where the U.S. has a strategic interest in being on the ground.
    I look forward to our panel's testimony and for the opportunity to 
continue this discussion in earnest during the question and answer 
period.

    Mr. Baird. I thank you, Mr. Hall, and as is the custom of 
this committee, if other Members wish to offer opening 
statements for the record, we will accept them into the record.
    [The prepared statement of Mr. Costello follows:]
         Prepared Statement of Representative Jerry F. Costello
    Good morning. Mr. Chairman, thank you for calling this important 
hearing to continue to examine the globalization of science technology, 
engineering, and mathematic (STEM) fields, and to further look at the 
impact of our universities expanding their campuses overseas. These 
actions will affect American students, U.S. competitiveness, and our 
overall economy.
    In 2005, Congressman Gordon and I hosted a roundtable discussion to 
examine the offshoring trend. At that time, we learned from our 
witnesses that it is difficult to determine how many jobs we have 
actually lost because of a lack of sufficient and accurate information 
on the problem. However, while the overall effect of offshoring jobs in 
our economy is still uncertain, it has become clear that it is hurting 
American workers. What is good for America's global corporations no 
longer necessarily means good-paying jobs for American workers.
    Today, we are focusing on high prestige universities building 
campuses and expanding their programs overseas. I have major concerns 
with this direction and the effect this will have on our students, U.S. 
competitiveness and our economy today and in the future. I want to be 
sure that we continue to make the maximum effort to recruit and retain 
American students in the math and science fields.
    Yesterday, the Chicago Tribune ran an article, ``As wages fall, 
workers slip from middle class.'' The article talks about a woman who 
realized her $30-an-hour assembly line manufacturer job was not going 
to be around forever. She took the necessary steps to prevent financial 
devastation and completed a Bachelor's degree before the plant closed. 
Even with a four-year Bachelor degree, she is currently making far less 
than before, a plight that has reached highly skilled technology 
workers as well.
    Mr. Chairman, I look forward to hearing from our witnesses on how 
these actions will impact America's competitiveness and, more 
importantly, what steps the universities are taking to strengthen the 
U.S. STEM curriculum to ensure American students remain competitive in 
these areas.

    [The prepared statement of Ms. Johnson follows:]
       Prepared Statement of Representative Eddie Bernice Johnson
    Thank you, Mr. Chairman.
    In October 2005, this committee held a hearing on out-sourcing of 
technology jobs in the United States.
    During that hearing, Norm Augustine, principal author of the Rising 
Above the Gathering Storm report, stated that,

         ``Eight different studies conducted in recent decades indicate 
        that public investments in science and technology have produced 
        societal returns that range from 20 to 67 percent per year.

         Various other studies have concluded that between 50 and 85 
        percent of the Nation's growth in GDP per capita during the 
        last half-century can be attributed to science and engineering 
        progress.''

    Multiple indicators tell us our nation is falling behind, when it 
comes to world competitiveness in science, technology, engineering and 
math.
    Congress and the President must support universities, industry and 
the public education system to remain competitive.
    I am interested to know how globalization affects America's 
universities.
    Today's witnesses will provide an important perspective on how 
universities are responding to the growing pressure and also how they 
have addressed the growing influx of international students on campus.
    Thank you, Mr. Chairman. I yield back.

    Mr. Baird. So again, I am very delighted by this extremely 
distinguished and accomplished panel of experts here to 
enlighten us.
    Dr. David Skorton is President of Cornell University. Dr. 
Gary Schuster is Provost and Vice President for Academic 
Affairs at the Georgia Institute of Technology. Mr. Mark Wessel 
is Dean of the Heinz School of Public Policy at Carnegie Mellon 
University. Dr. Philip Altbach is Monan Professor of Higher 
Education and Director of the Center for International Higher 
Education at Boston College.
    Thank you gentlemen very much for being here. As we 
discussed, the custom of the Committee is to allow five minutes 
of testimony, far too brief for something this important, but 
that will be followed by a very good give-and-take. There is a 
small box on your table there that illustrates when your time 
is running low, and as my dear friend Dr. Ehlers used to say, 
if we pass much past five minutes, a trap door emerges and you 
disappear--something you wish you had in your faculty meetings, 
I am sure.
    Please, we will begin with Dr. Skorton, and thank you all 
for being here.

     STATEMENT OF DR. DAVID J. SKORTON, PRESIDENT, CORNELL 
                           UNIVERSITY

    Dr. Skorton. Good morning Chairman Baird, Ranking Member 
Hall, and Members of the Committee. My name is David Skorton. I 
am President of Cornell University. I want to start, Mr. Hall, 
by saying that Cornell does not have a position on Texas 
history at the Alamo.
    Cornell is located in Ithaca, New York, with campuses or 
programs in New York City; Geneva, New York; Appledore Island, 
Maine; Arecibo, Puerto Rico; France; England; Italy; Singapore; 
China; Tanzania; Qatar; and 45 other countries as Cornell 
Abroad destinations. It is not only the largest and most 
comprehensive school in the Ivy League, it is also the Land 
Grant university for New York State.
    Our enrollment is approximately 20,000, with students from 
every state, and more than 3,000 students from 120 other 
countries, studying under an internationally renowned faculty. 
We are one of the most international of American universities.
    I thank you for having the hearing, and for inviting me to 
share one university's perspective on the globalization of 
research, development, and innovation. You have asked us to 
address three questions, the first regarding our motivations 
and decision factors in establishing overseas branch campuses. 
The second, how our internationalization impacts the global 
research enterprise, and the third, how we prepare our students 
to compete in a globalized marketplace.
    The most important message, though, that I want to 
emphasize today, is the enormous role higher education plays 
and can play in intercultural exchange, and thereby, in 
American diplomacy. I firmly believe that international 
education, research, and capacity building are among our 
country's most effective diplomatic assets.
    I have answered each of the Committee's questions in detail 
in my written statement and two appendices, but will summarize 
the key points for you now.
    First, the Weill Cornell Medical College in Doha, Qatar, is 
the first American medical school to offer an M.D. overseas. In 
2001, we were invited to establish this campus by the 
government of Qatar through the Qatar Foundation for Education, 
Science, and Community Development in Education City, which 
also houses campuses of Virginia Commonwealth University, 
Georgetown University, Texas A&M University, and Carnegie 
Mellon University.
    As with all of our long-term academic alliances with 
international entities, we ask ourselves two key questions: 
one, what makes the relationship worth pursuing; and two, what 
will make the relationship work? The guiding principle is 
always twofold. The benefits must be compelling, and the risks 
must be manageable, and we have made public in the appendix to 
my comments the exact checksheet that we have used in 
negotiating and considering other branch campus or joint degree 
activities.
    Cornell saw the Qatar Foundation's invitation as an 
opportunity for students from the Middle East to obtain a 
quality medical education in their own region to improve the 
quality of health care in that region. In addition, we saw an 
unprecedented opportunity for our faculty to teach and 
understand another culture, and to broaden their research to 
investigate the unique medical problems of the region.
    The Qatar Foundation assumes all the expenses of the 
building, operating the school, and we estimate that to be $750 
million over the first decade of operation. We are looking 
forward to awarding the first medical degrees in Doha in the 
spring of 2008, and we will be carefully monitoring the success 
of the degree candidates on standardized tests, and on 
employment placements as two measures to gauge the rigor of the 
program.
    The second question. It is not clear what the effect of our 
branch campuses will be on the global science and technology 
enterprise, as Mr. Hall mentioned. It is still too early and 
there are too many variables, but while globalization may be a 
new concept in the public rhetoric, Cornell and these schools 
have a long history of internationalization, in our case, going 
back to our first international students in 1868, and now 
involving all of our colleges and professional schools, and 
nearly every program on campus.
    Based on this long experience, we know that any cooperation 
across borders can play an important role in promoting cross-
cultural understanding, and that real and substantial benefits 
accrue to the U.S. and to the process of innovation, the driver 
of our global economic competitiveness.
    The third question. Much of what we do as a university is, 
of course, aimed at ensuring the success of our graduates. In 
this regard, we are responding to the demands of our students 
in STEM fields for instruction in critical needs languages, 
such as Arabic, Mandarin, Russian, Hindi, and Farsi, which are 
among the more than 40 languages taught at Cornell.
    We encourage students to study abroad, and we have created 
internationally focused undergraduate programs, such as a new 
major in China and Asia-Pacific studies, which is designed to 
train leaders equipped to negotiate the delicate complexities 
of U.S.-China operations.
    Just as important as sending students overseas, Cornell 
welcomes thousands of international students each year. These 
students contribute to the diversity of the campus, to the 
community, and to education of all students. Our international 
graduates who stay in this country, especially in science and 
engineering fields, help fill a crying need for scientific and 
technical talent not currently being filled by American 
students.
    Those who return home often maintain contact with Cornell 
or other American colleagues, laying the foundation for 
continuing collaboration. In addition, our many international 
collaborations help prepare Cornell students for a place in the 
global economy, by addressing problems and issues in which both 
societies have a stake.
    I want to make the Committee aware that in keeping with the 
conversation with India's Prime Minister in January, Cornell 
will be working with other U.S. universities and Indian 
counterpart institutions to create a faculty-led Indo-U.S. 
Working Group to develop joint research agendas on critical 
challenges of interest to both nations.
    In concluding my remarks, I want you to consider, please, 
the concept of universities as the catalyst for capacity 
building in the developing world. The initiatives aimed at 
strengthening competitiveness and education in STEM 
disciplines, both from this committee's leadership and from the 
Administration, are pointing us, as a nation, in the right 
direction, but just as you are right to be concerned about the 
U.S. losing ground potentially to China and India, we must also 
be concerned about the socioeconomic inequalities that threaten 
our country and our world.
    Universities are perfectly positioned to play a central 
role, like the Marshall Plan did 60 years ago in Europe. 
Through aid and joint planning, the Nation's great research 
universities, working with governments, the private sector, 
NGOs, and our colleagues overseas, can offer a more focused 
application of our own resources to improve the quality of life 
here and abroad.
    Chairman Baird, thank you again for inviting me to 
participate. I am pleased to answer any questions the Committee 
may have.
    [The prepared statement of Dr. Skorton follows:]
                 Prepared Statement of David J. Skorton
    Good morning Chairman Baird, Ranking Member Hall, Members of the 
Committee. My name is David Skorton. I am the President of Cornell 
University. Cornell University, located in Ithaca, N.Y., with campuses 
or programs in New York City, Geneva, NY, Appledore Island, ME, 
Arecibo, PR, France, England, Italy, Singapore, China, Tanzania, Qatar 
and elsewhere, is the largest and most comprehensive school in the Ivy 
League and is the land-grant university of the State of New York. 
Founded in 1865, it is composed of 10 privately endowed and four State 
contract colleges, including seven undergraduate colleges and seven 
graduate and professional units. Our four contract colleges are units 
of the State University of New York (SUNY). Enrollment is approximately 
20,000, with students from every state and more than 120 countries 
studying under an internationally renowned faculty. Forty Nobel Prize 
winners have been affiliated with Cornell University as alumni or 
faculty members, and three Nobel laureates currently are on the 
faculty, in chemistry and physics.
    Cornell is among the top 10 research universities in the Nation, 
based on research expenditures. It is home to four national research 
centers, in physics, astronomy, and nanotechnology. In addition, it has 
many interdisciplinary research centers, covering advanced materials, 
manufacturing, agriculture, astronomy and atmospheric science, 
biotechnology, electronics, environment, computing and mathematics. 
Cornell also boasts the Nation's first colleges devoted to hotel 
administration, industrial and labor relations, and veterinary 
medicine. The university's Weill Cornell Medical College in New York 
City is a pioneer in biomedical technology, with special-treatment and 
research facilities including the Center for Reproductive Medicine, the 
AIDS Care Center, the Hypertension Center, the Institute of Genetic 
Medicine, and the Burn Center.
    Thank you for inviting me to share one university's perspective on 
the globalization of research, development, and innovation. I commend 
the Members of the Science and Technology Committee for your continuing 
interest in this important and timely issue. This committee, along with 
your Senate counterparts, directed the National Academies to produce 
the Rising Above the Gathering Storm report. I am proud of Cornell's 
contributions to that effort--our Vice Provost for Research, Dr. Robert 
Richardson, was a member of the Committee that produced the report.
    In many ways, that document provided a wake-up call for policy-
makers by compiling a lot of the things we already knew about American 
competitiveness in one place, and, more importantly, by making a series 
of recommendations for actions we must take to maintain our position as 
a world leader in technology, research, and innovation. In the area of 
higher education, the Gathering Storm focused on things we can do at 
home: increasing federal funding for basic research; providing 
undergraduate scholarships and graduate fellowships for science, math, 
and engineering students; and rationalizing the immigration process for 
international students, faculty, scientists, engineers, and researchers 
who study and work in U.S. universities and industry.
    The Science and Technology Committee has gone a long way toward 
implementing those recommendations, and I thank you for your efforts. I 
am also grateful that the Gathering Storm is just the starting point of 
your inquiry into globalization. By calling this hearing, you recognize 
that it is not just what we do at home that matters; it is what we are 
doing in the rest of the world that will ultimately determine whether 
we succeed in the twenty-first century.

COMMITTEE QUESTIONS

    The Committee has asked me to address three questions:

1.  What was the general motivation for your institution to establish 
branch campuses overseas? What factors did you consider in making the 
decision to expand overseas, especially in terms of locations, costs, 
staffing, and the impact on the home campus?

2.  What do you anticipate the effects of these overseas branch campus 
programs will be on the overall global science and technology 
enterprise, especially in terms of jobs available to your home and 
branch campus graduates? What sorts of data and information are you 
collecting to determine if the effects are matching your original 
goals?

3.  How are you adjusting your home campus science and engineering to 
better respond to the increasingly globalized economy?

    I will address the first question, as it relates to Cornell's 
branch campus in Education City, Doha, Qatar, later in my testimony.
    Regarding the second question, let me say that it is not yet clear 
what the effects of branch campuses will be on the global science and 
technology enterprise. The opportunity to expand the pool of knowledge 
for interactions, collaborations, and the exchange of ideas will 
benefit all nations. The specific outcomes will depend on several 
factors beyond the purview of higher education including the regulatory 
environment, the political environment, the economic climate supported 
by the host country and foreign investment, as well as our ability to 
attract and retain American students in STEM fields. Our past 
experience, though, indicates that institution-to-institution 
cooperation can play an important positive role in promoting cross-
cultural understanding and that real and substantial benefits accrue to 
the U.S., to our institutions, to our students, staff and faculty, and 
to the process of innovation, which is the driver of our economic 
competitiveness in a globalized world. Data will be gathered concerning 
performance on standardized examinations and employment outcomes of 
students in the branch campus programs.
    Regarding question three, concerning adjustments we are making on 
our own campus to the challenges of globalization, we are responding to 
the increasing demands of our students for language instruction, 
including in the critical need languages of Arabic, Mandarin, Russian, 
Hindi, and Farsi. We are encouraging students to pursue study abroad, 
and we have created new undergraduate programs, such as our 
undergraduate major in China and Asia-Pacific Studies, which is 
designed to train future leaders who are equipped to address the 
inevitable challenges and negotiate the delicate complexities in U.S.-
China relations. Our faculty are encouraged to undertake collaborative 
research and engage in joint teaching ventures. We consider it 
imperative that both our students and faculty learn to understand world 
cultures as well as business practices and norms.

GENERAL COMMENTS ON INTERNATIONAL COLLABORATIONS

    Before I elaborate on the questions posed by the Committee about 
Cornell's international programs, I would like to emphasize that the 
issue of globalization for universities is much broader than whether 
and in what form we export our students, educational programs, and 
research enterprise. Science and engineering are already international 
and have been to an increasing extent for decades. University 
scientists and engineers collaborate with colleagues from throughout 
the world. Specialized ``big science'' facilities like CERN in 
Switzerland and Cornell's High Energy Synchrotron Source attract an 
international cadre of researchers. International scientific and 
professional meetings provide opportunities for scholarly exchange and 
networking. All these enterprises help advance knowledge and provide 
learning opportunities for American students and faculty members as 
well as for their colleagues from other nations.
    International collaborations also provide unique research 
opportunities for American faculty in fields from population genetics 
to economics, sociology and global health, and they can provide unique 
resources, such as genetic material that can be useful in breeding more 
stress-resistant, flavorful or productive crops. They can also address 
problems and issues in which the U.S. and international collaborators 
both have a stake. For example, in keeping with a conversation with 
India's Prime Minister Singh in January of this year, Cornell will work 
with other U.S. universities and Indian counterpart institutions to 
create a faculty-led Indo-U.S. working group to develop joint research 
agendas on critical challenges of mutual or complementary interest to 
the two nations.
    One of the greatest contributions that research and land grant 
universities have made over time is the development of human capacity 
through the dissemination of our research, teaching, and outreach. I 
understand that the Science and Technology Committee does not have 
jurisdiction over foreign affairs or international aid programs, but I 
do not think we can talk about what universities are doing overseas 
without considering our capacity to address global inequalities.
    I firmly believe that the enhancement of human capacity relies on 
and ensures political stability, security, robust public health, and 
effective education, which, in turn, lead to inquiry, discovery, and 
innovation in places where they are most needed. Since the Industrial 
Revolution, and increasingly in the last half century, innovation has 
led to enormous economic growth; the foundation of innovation is 
research; and the seat of fundamental research is the university. The 
university is also the seat of undergraduate, graduate, and 
professional education--education that leads to new generations of 
those who inquire, who discover, who innovate.
    For the U.S. to retain its strength in science and technology and 
its leadership in the global economy and to contribute meaningfully to 
the solution of the world's problems, we must attract the best and 
brightest students, staff and faculty members to our universities and 
to our business and industry irrespective of their national origins; we 
must instill an international perspective in all our students; and we 
must collaborate with others internationally as never before--for their 
benefit and ours and for inter-cultural understanding. I firmly believe 
that international education and research are among our country's most 
effective diplomatic assets.
    The Science Committee has jurisdiction over the programs that fund 
the research that can be deployed by universities, through their 
international programs, and by governments, NGOs and others, to raise 
living standards, improve health, provide economic opportunities, and 
promote peace in the poorest nations in the world. I believe we can 
draw on a lesson from our nation's history. Just as Secretary of State 
George Marshall proposed a massive program of aid and redevelopment for 
a war-ravaged Europe, I am calling for a new national approach, with 
university teaching, research, and outreach at its center, to address 
the socioeconomic inequalities that threaten our nation and the world 
and to spur economic growth through innovation and capacity building as 
the Marshall Plan did 60 years ago through aid and joint planning.

CORNELL'S APPROACH TO GLOBALIZATION

    While ``globalization'' is a relatively new concept, Cornell, like 
many American universities, has a long international history. Ours 
dates back to our founding, when five international students enrolled 
in the first class in 1868. Since then, Cornell has educated thousands 
of international students. Currently we enroll more than 3,000 
international students from 120 countries on campus. We rank thirteenth 
among the top 25 leading host institutions for international students 
in the U.S., even though our total enrollment is much lower than many 
of the other institutions on that list.
    Whether these students return to their home countries or stay in 
the U.S. to work or continue their studies, they contribute to 
America's strength. Those that stay in this country, especially in the 
sciences and engineering fields, help fill a real need for scientific 
and technical talent within universities and in industry. Those who 
return to their home countries often maintain contact with their former 
professors and students in their academic programs, laying the 
foundation for continuing collaboration and admissions referrals to our 
graduate programs.
    While enrolled at Cornell, international students contribute to the 
diversity of the campus community and contribute positively to the 
education of all students. This helps broaden the US students' 
knowledge and understanding of world cultures, which they will need as 
they enter the marketplace and seek jobs in our international economy.
    Today Cornell's international programs involve all of our colleges 
and professional schools and nearly every program on campus. Most 
visibly--and perhaps of greatest interest to the Committee--we opened a 
branch campus of our medical school in Doha, Qatar in 2001. We offer a 
joint degree program in Singapore (hotel/hospitality) and dual degree 
programs in China (Asian studies/political science) and India 
(agriculture). We operate our own study abroad programs in France, 
Rome, Tanzania, Nepal, Berlin and Tokyo. About 500 Cornell students 
each year enroll in a Cornell study abroad program or at an 
international university, with assistance from Cornell Abroad, for a 
semester or a year.
    In forging long-term academic alliances with foreign entities, we 
ask two key questions: What makes the relationship worth pursuing? What 
will make the relationship work? The guiding principle governing the 
evaluation, planning, negotiation, approval, establishment and 
operation of an academic alliance abroad is two-fold: the benefits must 
be compelling and the risks must be manageable. (See Appendix A)
    Our approach to globalization is essentially one of building 
capacity--we believe that as part of our mission we have a 
responsibility to carry out research on issues where new knowledge 
could make a difference, to extend ourselves to institutions of higher 
learning in other parts of the world, and to ensure access to our own 
system of higher education here at home. As I noted above, we do this 
in a number of ways:

          through our branch campus in Qatar;

          through interdisciplinary majors and joint or dual 
        degree programs with overseas universities chosen to be of 
        mutual benefit;

          through formal agreements with overseas universities 
        to promote international exchanges in specific programs;

          through foreign study at Cornell centers in other 
        countries; and through study abroad programs that focus on one 
        student at a time.

    Through organizations like Engineers for a Sustainable World, which 
was founded at Cornell and is now a nationwide organization, students 
can apply their engineering knowledge to address the needs of 
communities in the developing world. Many of our students have a strong 
interest in engaging in public service as part of their academic 
programs, and programs of this sort provide opportunities to learn 
while performing service on an international scale.
    We offer instruction in more than 40 languages including the 
critical need languages of Arabic, Hindi, Farsi, Mandarin, and Russian. 
Four of our area studies programs--East Asia, South Asia, Southeast 
Asia, and Europe--are recognized as National Resource Centers by the 
U.S. Department of Education. This designation signifies the breadth 
and excellence that these programs maintain in areas critical to U.S. 
national interests. Supported in part by federal funds, the programs 
directly promote the teaching of languages and also make their 
expertise available to the regional community by presenting films; 
organizing lectures, seminars, and workshops; and publishing books and 
working papers.

International Outreach and Collaboration

    Cornell's first significant international outreach project--the 
Cornell-Nanking Crop Improvement Program--began in the 1920s with three 
Cornell plant breeders who led a team that developed new strains of 
higher yielding rice, wheat, and other staple crops. Its most important 
legacy was the development of a generation of Chinese plant breeders 
who could carry on the work in China once Cornell's formal involvement 
ended. You may have read about the project--Pearl S. Buck, M.A. '25, 
accompanied her husband John, an agricultural economist, to Nanking and 
wrote about her experiences in The Good Earth.
    Today we have well over 150 agreements for programs in more than 50 
countries that run the gamut of arts and sciences, engineering, the 
professions, agriculture, and labor relations. Our peers offer many of 
the same types of international programs as we do, but Cornell is among 
the leaders in the scale and scope of its international efforts.
    Research and extension carried out abroad can provide valuable 
assistance to the host country while frequently also creating knowledge 
that can be applied to problems in the U.S. In the case of agricultural 
research, for example, cooperation with agricultural scientists abroad 
creates opportunities to share germ plasm that can be used to enhance 
pest resistance, flavor, drought or cold resistance, productivity and 
other characteristics that can increase the value of U.S. crops. To 
improve apples, for example, genetic diversity is critical for such 
important traits as insect resistance and fruit quality. Toward this 
end, researchers from the Cornell University-based Plant Genetic 
Resources Unit at Geneva, New York have organized and led expeditions 
to Kazakhstan's wild apple groves since 1989, and now maintain a living 
library of apple species that is used by researchers at the Experiment 
Station and worldwide.
    Our work in India goes back more than 50 years, and with the 
formation of the new Indo-U.S. working group I mentioned earlier, we 
see potential for addressing issues and research areas that will 
benefit both nations. Similarly, we need the capabilities of other 
universities to address such world problems as global climate change, 
alternative energy, AIDS/HIV and other global health issues.
    In engineering and other high technology fields, a strong presence 
internationally helps us attract the very best students in the world to 
study in the U.S. While some of these students will return to their 
home countries, others will find employment with U.S. companies, 
contributing to the ability of those companies to innovate. This will 
be increasingly important to U.S. companies as the current ``baby 
boom'' generation of scientists and engineers nears retirement age.
    Yet, even now, fewer of the best students from Asia are coming to 
the U.S. to study. We will not have the workforce to conduct necessary 
research that leads to innovation and prosperity without international 
students. We will also have a hard time replacing the current 
generation of faculty members at our universities and scientists and 
engineers in our industries without international students. We must 
continue these international collaborations and exchanges as we build 
our capacity as well as capacity overseas.
    The Committee's questions suggest that in creating international 
collaborations and partnerships, we are giving something away. Let me 
stress again, as strongly as I can, that the benefits of these 
collaborations accrue to the U.S. at least as much as to our partners 
abroad. A new national plan to build capacity at home and abroad is, in 
my view, essential to establishing strong and economically vibrant 
nations and to ensuring world peace.

EXAMPLES OF INTERNATIONAL PARTNERSHIPS

    The following examples of Cornell international programs are 
illustrative of the types of our overseas initiatives. It would be 
impractical for me to list every one of our international programs in 
my written statement--the Mario Einaudi Center for International 
Studies, which has coordinated Cornell's international programs since 
1961, has compiled an exhaustive list of our international centers, 
programs, and initiatives in its 121-page annual report. I am providing 
a copy of this report for the hearing record. Interested readers can 
read or download the annual report at http://www.einaudi.cornell.edu/
initiatives/ar.asp

Branch Campus--Weill Cornell Medical College-Qatar

    Weill Cornell Medical College in Qatar (WCMC-Q) is the first 
American medical school to offer its degree overseas; it is also the 
first coeducational institution of higher education in Qatar. It is one 
of five American universities to be represented in Education City, 
Doha, Qatar. The others are Carnegie Mellon University, Virginia 
Commonwealth University, Texas A&M University, and Georgetown 
University.
    Cornell was invited to open our medical school by the government of 
Qatar through the Qatar Foundation for Education, Science and Community 
Development. The school was established in April 2001 as a partnership 
between Cornell and the Qatar Foundation. The Qatar Foundation is a 
private, non-profit organization set up in 1995 by Sheikh Hamad Bin 
Khalifa Al-Thani, Emir of the State of Qatar, and headed by his wife, 
Sheikha Mouza Bint Nasser Al-Misnad. The Foundation assumed all the 
expenses of construction, operation, and maintenance of the campus. 
Those costs are estimated to be $750 million over ten years.
    Cornell saw this invitation to establish a new medical school in 
Qatar as an opportunity to provide medical education in an important 
region of the world and thereby become part of the developing trend in 
medical education, which takes advantage of modern communication and 
transportation, and enhances Cornell's reputation as an international 
university. The new school provides an opportunity for students from 
the Middle East to obtain a quality medical degree in their home region 
of the world and improve the quality of health care in the region. It 
provides opportunities for our faculty to experience the challenges of 
teaching in another culture and to investigate the unique medical 
problems of the region through research in population genetics and 
other fields. Just recently Qatar announced that they would devote 2.8 
percent of the country's gross domestic product to research. It is also 
a potential source of international patient referral to our medical 
center in New York City.
    Cornell has full authority and discretion to select and supervise 
the academic and administrative staff; admit, enroll and instruct 
students Cornell deems qualified; establish manageable personnel 
appointment and student enrollment benchmarks and time lines; ensure 
equal opportunity and non-discrimination anchored in U.S. and New York 
State law to students, faculty and staff; and prescribe plans and set 
standards governing the operation of the pre-medical and medical 
programs of Cornell caliber and quality.
    Pre-medical faculty hold appointments at Cornell University; 
medical faculty are members of academic departments at Weill Cornell 
Medical College. The pre-medical program is a non-degree set of courses 
in the sciences basic to medicine, with seminars in writing and medical 
ethics. The medical program, which replicates the curriculum taught at 
Weill Cornell in New York City, features a variety of learning 
experiences, including problem-based learning, case-based conferences, 
journal clubs, lab work, and lectures.
    The pre-medical program began in 2002, with 25 students enrolled. 
The medical program matriculated its first class of 16 students in 
2004. By 2006, the pre-medical program had matriculated 46 first-year 
students, while the medical program had matriculated 26 first-year 
students. We are looking forward to awarding the first medical degrees 
in Qatar in the spring of 2008, and we will be monitoring the success 
of the degree candidates as a way to gauge the rigor of the program. We 
are hoping that many of these students will stay in the Middle East, 
which desperately needs more qualified physicians.
    More information about Cornell's branch campus in Qatar and the 
medical education program at WMCC-Q is available at http://www.qatar-
med.cornell.edu/ and in Appendix B.

Joint Programs

          Singapore. The Master of Management in Hospitality 
        Program is a joint degree program. This year long, three-
        semester program can be taken either completely in Ithaca or by 
        spending six months in Ithaca and six months at the Nanyang 
        Institute of Hospitality Management at Nanyang Technological 
        University in Singapore.

          India. The Agriculture in Developing Nations Course 
        is a joint Cornell-India distance education course. Students in 
        the course, from Cornell and from three Indian universities, 
        listen to the same lectures. The Indian students come to 
        Cornell at the end of the fall semester for a two-week tour of 
        agriculture/agribusiness facilities on the Cornell campus in 
        Ithaca and at Cornell's New York State Agriculture Experiment 
        Station in Geneva, and elsewhere in the Central New York area. 
        In January, Cornell students in the course join their 
        counterparts in India for tours of Indian agricultural and 
        agribusiness sites and prepare team projects. The College of 
        Agriculture and Life Sciences has offered this course for 30 
        years, to prepare students to work in a global economy. A 
        complementary (and older) version of the course focuses on 
        agriculture in South and Central America.

          Tanzania. The Weill Bugando University College of 
        Health Sciences and the Weill Bugando Medical Center in Mwanza, 
        Tanzania have formal affiliations with Weill Cornell Medical 
        College. Through this affiliation, Weill Cornell Medical 
        College students and faculty gain valuable international 
        clinical and research experience. This program helps address 
        the immediate health needs of people in Tanzania and train more 
        physicians for a country that currently has only one doctor for 
        25,000 people compared to one per 400 people in the U.S.

Scholarly Exchange Programs

          China. The Tsinghua University-Cornell College of 
        Engineering Partnership is a scholarly exchange program, 
        primarily involving faculty, in areas where both institutions 
        have knowledge to share. Building on many years of informal 
        faculty and graduate student exchanges, Cornell and Tsinghua 
        University signed a formal exchange agreement in 2004. My 
        predecessor, Hunter Rawlings opened the first Tsinghua-Cornell 
        workshop, which focused on information science and computer 
        engineering, in Beijing in November 2005. A group from Tsinghua 
        came to Cornell the following spring (2006) for sessions on 
        nanotechnology. Faculty from the Cornell Center for the 
        Environment went to Tsinghua in June 2006 to share perspectives 
        on environmental research. This year Tsinghua will send some 30 
        faculty members to Cornell for sessions on energy, 
        environmental quality and global climate change. We have a 
        similar agreement for research collaboration and scholarly 
        exchange with Jiao Tong University in Shanghai.

          Developing Nations. The Cornell International 
        Institute for Food, Agriculture, and Development (CIIFAD) is an 
        international extension and outreach program that pairs faculty 
        and students from Cornell's College of Agriculture and Life 
        Sciences with partners in Africa, Asia and Latin America. The 
        CIIFAD program initiates and supports innovative programs that 
        contribute to improved prospects for global food security, 
        sustainable rural development, and environmental conservation 
        around the world. Many of these programs seem to increase food 
        security in developing countries by linking scientists and 
        farmers in Asia, Africa, and South America with agricultural 
        researchers in advanced labs in developed countries. CIIFAD, 
        for example, help promotes a system of rice intensification to 
        increase the productivity of irrigated rice by changing the 
        management of plants, soil, water and nutrients. The system, 
        which can double yields while requiring only half as much 
        water, is now being tried in nearly 40 countries around the 
        world.

          United Nations University Food and Nutrition 
        Programme for Human and Social Development (UNU-FNP). The UNU-
        FNP, created to address issues of world hunger, has been housed 
        at Cornell University since June 1996. It has developed 
        networks of scholars and universities which include nutritional 
        scientists, food scientists, agronomists, biochemists, 
        biostatisticians, epidemiologists, economists, sociologists, 
        and others, to assist in the application of nutrition knowledge 
        to combat hunger and address global nutrition issues. Cornell 
        works jointly with Wageningen University, the Netherlands and 
        Tufts University, to administer the UNU-FNP.

          France. Cornell University Center for Documentation 
        on American Law in Paris is a scholarly partnership with the 
        French court system. The center, which opened two weeks ago on 
        July 16, is located within the court in the Palais de Justice. 
        It houses 13,000 law books from Cornell's Law Library and 
        offers special training and instruction in online research by 
        Cornell law librarians. This new partnership supplements 
        Cornell Law School's current relationships in France, including 
        its 14-year joint venture with the University of Paris 1 
        (Pantheon-Sorbonne), the Summer Institute of International and 
        Comparative Law in Paris, and a four-year American/French law 
        degree program.

Undergraduate Majors

          China-Asia Pacific Studies. The China and Asia-
        Pacific Studies Program is an interdisciplinary, international 
        undergraduate major for Cornell students. The CAPS program 
        combines intensive study of Mandarin, Chinese history, culture 
        and foreign policy with study and work/internship experiences 
        in Washington, D.C. and at Peking University in Beijing. It is 
        designed to equip students for leadership roles in a variety of 
        fields including business, government service, diplomacy, 
        education and journalism. A maximum of 20 students are admitted 
        as CAPS majors each year.

Cornell International Facilities

          Italy. The Cornell in Rome Program is an educational 
        program for Cornell students based at a Cornell facility. For 
        20 years, Cornell's College of Architecture, Art and Planning 
        has offered students an opportunity to study in Rome with a 
        home base at a Cornell facility. The curriculum for the Rome 
        Program includes art and architecture studios, core courses in 
        planning, art and architectural history, theory and criticism, 
        photography, drawing, Italian language and culture, and cinema. 
        On average about 55 students participate each semester.

Study Abroad

          The Cornell Abroad program offers Cornell 
        undergraduate students a way to spend a semester or an academic 
        year abroad as an integral part of the undergraduate 
        experience. Study abroad programs are largely tailored to 
        individual students' needs, and may be run directly by Cornell, 
        by other American colleges and universities, by free-standing 
        study abroad agencies, or directly by programs that have been 
        developed to meet the special academic interests of Cornell 
        students. Every year, approximately 500 Cornell students 
        participate in this program, studying in 45 countries around 
        the world.

CONCLUSIONS AND RECOMMENDATIONS

    As I conclude my remarks, I would like to go back to the concept of 
universities as the catalyst for a new approach to capacity building in 
the developing world. Much of the work and resources must come from 
governments through traditional vehicles, such as the U.S. Agency for 
International Development, as well as promising new approaches such as 
the Millennium Challenge Corporation and others. The initiatives aimed 
at strengthening competitiveness and STEM education, both from this 
committee and the administration, are pointing us as a nation in the 
right direction. However, universities must play a central role--
through capacity building based on comprehensive programs of teaching, 
research and outreach--to assist countries struggling to meet the needs 
of their citizens.
    Indeed, the development of human capacity is the basis for the most 
robust strategies for ameliorating global inequalities and is one of 
the most significant contributions that our great universities make. No 
single university, acting alone, can achieve what will be needed in 
tomorrow's world. Together, however, the Nation's great research 
universities--public and private, land grant and Ivy league--working 
with our government, the private sector, NGOs and, most critically, our 
colleagues overseas--can offer a more focused application of our own 
resources to reach out, materially and directly, to assist and improve 
the quality of life elsewhere.
    Chairman Baird, thank you again for inviting me to testify at this 
hearing. I would be pleased to answer any questions the Committee may 
have.

APPENDIX A

       FORGING LONG-TERM ACADEMIC ALLIANCES WITH FOREIGN ENTITIES

                            James J. Mingle
          University Counsel and Secretary of the Corporation
                           Cornell University
Key questions:

1.  What makes the relationship worth pursuing?

2.  What will make the relationship work?

    Main features of proposed program:

          degree granting program?

          major research collaboration?

          both?

          U.S. university degree?

          dual degrees by U.S. and foreign universities?

          joint degree?

          long-term or

          short-term relationship?

    Guiding principle governing the evaluation, planning, negotiation, 
approval, establishment and operation of an academic alliance abroad:

1.  the benefits must be compelling, and

2.  the risks must be manageable

    Three-phased approach:

I.  exploratory phase

II.  due diligence and planning phase

III.  decision and contract formation phase

I. EXPLORATORY PHASE

          identify potential benefits

          check with other U.S. universities who have programs 
        in the foreign country (or considered, but declined)

          gauge university's negotiating leverage

          visit the foreign venue and meet the potential 
        partners

          determine the principal players: who will commit 
        financial resources to the project, and who will contract on 
        the foreign entity's behalf:

                  the government?

                  governmental agency?

                  a university?

                  private organization, foundation?

                  combination of these entities?

          take stock whether ``distance,'' ``climate'' or 
        different ``culture, customs'' are positives or possible 
        impediments

          deal with the ``deal breakers'' upfront--threshold 
        conditions, commitments before launching the due diligence 
        phase:

                  ownership of capital assets?

                  academic freedom and non-discrimination?

                  nature of degree (sole, joint or dual)?

                  academic autonomy (standards, curriculum, 
                admissions)?

                  operational control (complete or shared)?

                  financial resources? management fee?

                  accrediting and licensing implications?

                  legal relationship (subsidiary corp'n, 
                management contract)?

                  use of university name?

                  governance arrangement? joint advisory board?

                  term and exit strategies?

                  other?

          settle on planning costs (who pays?) and due 
        diligence timetable

          craft, sign ``fundamental principles'' letter

          brief president, board and faculty leadership

II. DUE DILIGENCE AND PLANNING PHASE

          map things out:

                  drawing from ``fundamental principles'' 
                letter, outline key ``academic,'' ``business/finance,'' 
                and ``legal/risk'' issues

                  form internal project team and assign areas 
                of inquiry; designate chair

                  engage external consultants as needed (e.g., 
                business, legal, security, architects)

                  enlist a few board members as advisory group

          anticipate and address ``daunting'' aspects of 
        project:

                  attracting ample pool of prospective students

                  developing or adapting curriculum

                  faculty and administrative recruiting, 
                staffing

                  dilution of home campus management time/
                energy

                  dealing with distance, climate, different 
                cultures

                  immigration, local sponsorship issues

          probe, protect against ``main risks'':

                  reputational risk

                          academic control?

                          governance oversight?

                  financial risk

                          no real property ownership?

                          operational costs covered?

                          tax exempt status?

                          legal safeguards?

                          exit strategies?

                  geopolitical risk

                          dependability of partner?

                          education a priority?

                          hospitable, stable environment?

          develop budget, business plan for full term of 
        relationship

          brief governing board and invite suggestions

          negotiate detailed ``term sheet'' with foreign 
        partner, confirming all key ``academic,'' ``business/
        financial,'' and ``legal/risk'' elements

          is project team convinced concerning ``compelling 
        benefits'' and ``manageable risks''? Is university leadership 
        on-board?

III. DECISION AND CONTRACT PHASE


          review, approval of appropriate faculty governance 
        groups

                  school/college faculty?

                  university faculty senate?

                  both?

          review, approval of university governing board

                  standing committee?

                  executive committee?

                  full board?

          craft comprehensive contract covering all points in 
        ``term sheet'', plus specific legal safeguards:

                  letters of credit

                  indemnification and insurance

                  early termination for ``cause'' or 
                ``emergency''

                  disengagement costs

                  monetary damages limitations

                  internal dispute resolution and international 
                arbitration

                  U.S. law controls

                  intellectual property ownership

                  local (foreign venue) ``liaison office''

          contract signing and press releases

          appoint program director

                  program implementation

APPENDIX B

               The Weill Cornell Medical College in Qatar

Rationale

          Cornell presence in an important part of the world

          Increase quality of education and health care in the 
        regionAn inn

          Innovative and pioneering project

          A first for an American university

          Research opportunities

          Unique partnership with the Qatar Foundation

          Potential source of international patient referral to 
        NYC

Governance and Operational Control

Governance

          The Dean of the Weill Cornell Medical College in 
        Qatar (WCMC-Q) reports to the Dean/Provost of Weill Cornell 
        Medical College (WCMC) and through him to the President of 
        Cornell University (CU), WCMC Board of Overseers and CU Board 
        of Trustees.

          The Cornell Boards of Overseers and Trustees are 
        responsible and provide oversight for the operation of the 
        academic programs. Cornell University has final authority on 
        all budgets.

          The Qatar Foundation (QF) provides and is responsible 
        for oversight of the facilities.

          To advise and assist the parties and the Dean of 
        WCMC-Q, a Joint Advisory Board has been established with four 
        members selected by the Cornell Boards and four by the QF. An 
        additional three independent members are selected jointly.

          The Joint Advisory Board meets twice annually. The 
        first meeting was held on December 9, 2001 in London. Currently 
        the Board is co-chaired by Dean Gotto and H.H. Ghalia Bint 
        Mohammed Al-Thani, M.D., Chairperson of the Board of Directors 
        of the National Health Authority of Qatar.

Operational Control

    Cornell has full authority and discretion to:

          Select and supervise academic and administrative 
        staff.

          Admit, enroll and instruct students Cornell deems 
        qualified.

          Establish manageable personnel appointment and 
        student enrollment benchmarks and timelines.

          Ensure equal opportunity and non-discrimination 
        anchored in U.S. and New York State law to students, faculty, 
        and staff.

          Prescribe plans and set standards governing the 
        operation of the pre-medical and medical programs of Cornell 
        caliber and quality.

Curriculum, Academic Freedom and Non-Discrimination
    Corneli has autonomy in:

          Developing and adapting a suitable curriculum that is 
        comparable in quality and structure to the program in New York.

          Applying principles of academic freedom that animate 
        classroom teaching and research.

          Establishing a program of study that will be co-
        educational.

Academic Credits and M.D. Degree

          Transferable credits for two-year Pre-medical 
        Program.

          M.D. degree will be granted by Cornell University 
        upon completion of four-year Medical Program.

Key Academic and Business Provisions

Implementation Timetable

          Academic Bridge Program\1\ 2001-2002
---------------------------------------------------------------------------
    \1\ Designed by the Texas International Education Consortium

---------------------------------------------------------------------------
          Pre-medical Program 2002-2004

          Medical Program 2004-2008

Program History

          Pre-medical program initiated on schedule in 
        September 2002 in temporary facilities.

          Program moved to permanent facilities during Summer 
        2003 in time for start of second year of Pre-medical program in 
        September 2003.

          New building dedicated October 2003.

          Medical program initiated in September 2004.

          First medical class will graduate May 2008.

Faculty Appointments

          Review of credentials and appointment of faculty to 
        WCMC-Q by CU faculty in accordance with CU policies and by WCMC 
        faculty in accordance with Medical College policies.

Students Per Class

          Capacity exists for 60 students in each of the Pre-
        medical classes, and for 50 students in each of the Medical 
        classes.

          A higher number may be admitted to the Pre-medical 
        Program, assuming a sufficient number of qualified applicants.

          Pre-medical Program First Year Matriculated Students:
                  2002--25 students
                  2003--31 students
                  2004--48 students
                  2005--58 students (inclusive of 5 students repeating 
                the first year program)
                  2006--46 students

          Medical Program First Year Matriculated Students:

                  2004--16 students
                  2005--18 students
                  2006--26 students

Qatari Admissions Priority

          WCMC-Q will admit to its Pre-medical and Medical 
        programs classes that reflect at least 70 percent 
        representation by Qatari citizens, assuming a sufficient number 
        of qualified applicants. Current student body composition 
        reflects approximately 17-18 percent Qatari students.

          Students who successfully complete the pre-medical 
        program have priority for admission to the medical program.

Admissions

          WCMC admission standards apply, including principles 
        of need-blind admissions and non-discrimination.

          WCMC-Q recommends candidate students to the WCMC 
        Admissions Committee for admission to the Medical program.

Teaching Facilities

          Basic Sciences (pre-medical and medical)

                  New building was erected in Education City by the 
                Qatar Foundation and was completed July 2003.

                  Approximately 400,000 sq. feet built to Cornell 
                specifications.

                  The WCMC-Q building was officially opened October 
                12, 2003.

           Clinical Sciences

                  Hamad General Hospital

                  Sidra Medical and Research Center (planned for 
                commissioning in late 2010)

                  Primary Care Clinics (n=22)

                     Biography for David J. Skorton
    David J. Skorton became Cornell University's 12th President on July 
1, 2006. He holds faculty appointments at the rank of Professor in 
Internal Medicine and Pediatrics at Weill Cornell Medical College in 
New York City and in Biomedical Engineering at the College of 
Engineering on Cornell's Ithaca campus. He is also Vice Chair and 
Chair-Elect of the Business-Higher Education Forum, an independent, 
non-profit organization of Fortune 500 CEOs, leaders of colleges and 
universities, and foundation executives.
    A seasoned administrator, board-certified cardiologist, biomedical 
researcher, musician and advocate for the arts and humanities, 
President Skorton aims to make Cornell a model combination of academic 
distinction and public service. He has vowed, among other goals, to 
continue and accelerate the transformation of the undergraduate 
experience in order to make Cornell the finest research university and 
provider of undergraduate education in the world; to integrate the 
activities of the Weill Cornell Medical College campuses in New York 
City and Doha, Qatar with the activities of the university's Ithaca and 
Geneva campuses in order to encourage interdisciplinary collaboration; 
to support appropriately the arts, humanities and social sciences, as 
well as scientific, technical and professional disciplines; and to use 
the university's vast and varied resources and talents to positively 
impact the world. In support of these goals, he launched, in October 
2006, the most ambitious fundraising campaign in Cornell history, a $4 
billion, five-year effort.
    Reflecting his personal commitment to diversity, President Skorton 
joined with Cornell Provost Biddy Martin to establish and co-chair the 
University Diversity Council. He serves as a house fellow at the Carl 
Becker House, one of the West Campus residential houses for continuing 
students. He also writes a monthly column for the Cornell Daily Sun and 
a bi-monthly column for the Cornell Alumni Magazine, and hosts a 
periodic radio program, Higher Education in the Round, on WEOS-FM, a 
local public radio station.
    Before coming to Cornell, President Skorton was President of the 
University of Iowa (UI) for three years, beginning in March 2003, and a 
faculty member at UI for 26 years. Co-founder and Co-Director of the UI 
Adolescent and Adult Congenital Heart Disease Clinic at the University 
of Iowa Hospitals and Clinics, President Skorton has focused his 
research on congenital heart disease in adolescents and adults, cardiac 
imaging, and computer image processing.
    He has published over 200 articles, reviews, book chapters, and two 
major texts in the areas of cardiac imaging and image processing. 
President Skorton has been the recipient of over 30 grants for 
research.
    A national leader in research ethics, President Skorton was charter 
President of the Association for the Accreditation of Human Research 
Protection Programs, Inc., the first entity organized specifically to 
accredit human research protection programs. He has served on the 
boards and committees of many other national organizations, including 
the American College of Cardiology, the American Heart Association, the 
American Institute of Ultrasound in Medicine, the American Society of 
Echocardiography, the Association of American Universities, the Council 
on Competitiveness, and the Korea America Friendship Society. He has 
traveled widely in Europe and Asia on behalf of both academic and 
community projects, and he engages in service to the community, and 
particularly in regional and State economic development, as a member of 
the board of directors of the Metropolitan Development Association of 
Syracuse and Central New York, Inc.
    President Skorton earned his Bachelor's degree in psychology in 
1970 and an M.D. in 1974, both from Northwestern University. He 
completed his medical residency and held a fellowship in cardiology at 
the University of California, Los Angeles.

    Mr. Baird. Thank you, Dr. Skorton. Dr. Schuster.

STATEMENT OF DR. GARY SCHUSTER, PROVOST AND VICE PRESIDENT FOR 
       ACADEMIC AFFAIRS, GEORGIA INSTITUTE OF TECHNOLOGY

    Dr. Schuster. Chairman Baird, Ranking Member Hall, Members 
of the House Committee on Science and Technology. I am the 
Provost of Georgia Institute of Technology, and I am honored to 
speak about Georgia Tech's overseas programs.
    Georgia Tech's international activities fall under the 
rubric of its mission, which is to define the technological 
research university of the 21st Century, and educate the 
leaders of a technology-driven world. Recognizing that 
innovation increasingly happens all around the globe, we are 
developing mutually beneficial research and education platforms 
overseas, with high quality international partners, whose 
research and educational interests align with ours.
    In selecting the locations and partners for these 
platforms, Georgia Tech observes a number of core principles. 
Platforms are chosen to provide a strategic advantage for 
Georgia Tech, and they have a research-driven motive, and a 
clear educational benefit for our own students. They operate 
within the parameters of the laws of the United States and 
Georgia, as well as the host nation. The activities must 
preserve the quality and integrity of Georgia Tech's 
reputation. Finally, we strive to operate them in a self-
supporting and revenue-neutral manner, relative to our other 
operations.
    Our oldest and largest international campus is Georgia Tech 
Lorraine in Metz, France, which was founded in 1990, and 
includes research as well as graduate and undergraduate 
education programs. A unique research unit between Georgia Tech 
Lorraine and the French National Center for Scientific 
Research, which is the largest and most influential research 
agency in Europe, allows us to collaborate with French 
researchers, and gives us early access to technology being 
developed in France. As an example, because France has a high 
level expertise in aspects of network security, we stand to 
gain from what we can learn from this partnership, to benefit 
the State of Georgia and the United States.
    Similarly, Singapore, where Georgia Tech also has a 
research and education program, is more advanced in some 
aspects of transportation logistics than the United States is, 
and we can benefit from our partnership there. This program 
includes research and logistics funded by the Singapore 
government agencies, and the first Master's degree in the 
region in logistics and supply chain management.
    In addition to the unique research opportunities provided 
through our foreign partnerships, our students also benefit 
from these relationships. As one of the Nation's top ten public 
universities, and its largest producer of engineers, we focus 
on educating graduates who understand technology in a global 
context. The nature of science and engineering curricula make 
study abroad difficult to accommodate, but our international 
platforms help us offer a wide array of opportunities. More 
than a third of our undergraduates study or work abroad. 
Seventeen of our undergraduate degree programs offer an 
international designator. This means special courses and 
overseas experience add a global context to their field of 
study, and that fact is noted on their diplomas. Our graduates 
are highly sought after by employers, and our alumni report 
that the international aspects of their education add value to 
their careers.
    Georgia Tech also works closely with the State of Georgia 
in economic development, and our international programs provide 
a point of access for the State to develop international trade 
and investment relationships. For example, in 2005, the 
President of Lorraine and the Governor of Georgia signed a 
formal agreement, under which Georgia Tech Lorraine will serve 
as a facilitator for business to business contacts. Georgia 
Tech's international activities have also attracted foreign 
corporate research labs to Atlanta to locate adjacent to our 
campus.
    In summary, our international platforms enable Georgia Tech 
to be a partner and collaborator in research discoveries 
happening in other parts of the world, and make our faculty and 
students citizens of the world.
    Thank you for the opportunity to testify before the 
Committee. I would be happy to answer any questions.
    [The prepared statement of Dr. Schuster follows:]
                  Prepared Statement of Gary Schuster
    Chairman Gordon, Ranking Member Hall, Members of the House 
Committee on Science and Technology, it is an honor to be here today 
and have an opportunity to discuss the impact on American universities 
of the globalization of R&D and innovation, and the university response 
to it. I am provost of the Georgia Institute of Technology, and have 
been asked to speak to the experience of my own institution in creating 
and operating international campuses.
    The Georgia Institute of Technology, familiarly known as Georgia 
Tech, is a 120-year-old technological university that is consistently 
ranked among the Nation's ten best public universities by U.S. News & 
World Report. The university is especially known for its engineering 
program, which is not only the Nation's largest, but is also ranked 
among its very best. Georgia Tech's selectivity is reflected in the SAT 
scores of its incoming freshmen, which average among the top five 
public universities in the Nation, and in the fact that the freshman 
class of 2006 contained a higher percentage of National Merit Scholars 
than any other public university in the United States. The quality of 
its faculty is demonstrated by the fact that Georgia Tech is among the 
Nation's top ten universities in National Academy of Engineering 
membership and recipients of the Presidential Early Career Awards in 
Science and Engineering (PECASE), and second in the Nation in 
recipients of National Science Foundation CAREER Awards. Among research 
universities with no medical school, Georgia Tech ranks among the 
Nation's top five in volume of research, both overall and federally 
funded. It is home to or partner in 20 federally funded national 
research centers of excellence. Recognized by numerous studies as a 
leader in technology transfer, Georgia Tech launches twice as many 
start-up companies as the norm for its volume of research and is home 
to the Nation's first university-based business incubator, which is 
also widely recognized as one of the Nation's best.
    Like business and industry, research universities are faced with 
the challenge of competing in a new global environment. History shows 
us that the arts, sciences and technology have always advanced the 
fastest in trading centers. In an economy in which knowledge has 
emerged as the most valuable economic asset, universities are the 
knowledge trading centers. Historically viewed as ivory towers elevated 
above the workings of the everyday world, universities are now called 
upon to adapt to new roles and challenges as drivers of innovation, 
economic development, and prosperity in a global economy.
    Georgia Tech's international activities fall under the rubric of 
its aspiration and mission, which is to define the technological 
research university of the 21st century and educate the leaders of a 
technologically driven world. In today's economy, this goal becomes a 
matter of defining a new academic paradigm that is effective in driving 
innovation and promoting economic well-being. How do we conduct 
research that generates innovation and educate our students in ways 
that enable our graduates to succeed and thrive in this environment? 
How do we as a public university of the State of Georgia serve the 
needs and efforts of our state and the United States to maintain and 
improve economic competitiveness? How do we contribute to solving 
seemingly intractable global problems that are critical to our well-
being, from fresh water supplies to terrorism to global climate change? 
These are the motivating questions behind our efforts to develop a 
global university with a presence in strategic places around the world.
    Like a number of American research universities, Georgia Tech 
engages in research on global problems and provides expanded 
opportunities and encouragement for its students to study abroad. Where 
Georgia Tech seeks to take a unique and more complex approach is with 
our international campuses. In short, we are shifting our mindset from 
a 20th century context focused exclusively on attracting the best 
talent to our home campus to a 21st century model of mutual exchange 
and partnership. Our goal is to build one of the world's few truly 
global universities.
    The fundamental research that underlies innovation, which is 
conducted largely at research universities, thrives in an environment 
of openness and collaboration. Even researchers who are vying with each 
other to be the first to make a particular breakthrough discovery, 
often share information and are sometimes even collaborators. As 
developing nations establish world-class universities and research 
programs, breakthrough discoveries will occur in many locations around 
the world, rather than being concentrated in the United States and 
other developed nations. Georgia Tech's goal is to be present in those 
other locations--to be a partner and collaborator in discoveries that 
happen in other places, so that we here in the United States can 
leverage and benefit from the discoveries of others, just as others 
have and will leverage and benefit from discoveries made in the United 
States.
    To achieve that goal, we are developing research and education 
platforms around the globe that are consistent with Georgia Tech's 
vision, mission, and strategic endeavors. In establishing these 
campuses, we look for a strategic advantage for Georgia Tech, a 
research-driven motive, and a clear educational benefit for our own 
students. We have been approached on numerous occasions by other 
nations looking primarily for a ``provider'' of engineering degrees to 
their citizens and have declined. While we believe that widespread 
educational opportunity is a good thing, we also recognize that there 
is a limit to the number of international initiatives that we as an 
institution can maintain, and we intend to be strategic and focused 
about what we undertake.
    In selecting locations and developing formats for strategic 
international research and education platforms overseas, Georgia Tech 
observes a number of principles:

        1.  They are in the best interests of and to the benefit of 
        Georgia Tech and our faculty and students, and they complement 
        what we do in Atlanta.

        2.  They operate in accordance with the laws of the United 
        States and the state of Georgia. This requirement is 
        comprehensive, ranging from export controls to IRS rules, from 
        the requirements of the Bayh-Dole Act to regulations regarding 
        a drug-free workplace.

        3.  They operate within the laws and respect the culture of the 
        host nation.

        4.  They operate in accordance with the rules governing Georgia 
        Tech's accreditation.

        5.  They are consistent with Georgia Tech's charter, by-laws, 
        policies, and academic and ethical standards. We will not 
        sacrifice either quality or integrity.

        6.  They will operate in a self-supporting and revenue-neutral 
        manner relative to our other operations. We do not undertake 
        international activities to make money, nor do we invest any 
        state or federal tax funds in the operation of these endeavors.

    The Hearing Charter for this morning indicates that ``Georgia Tech 
is building a campus in Andhra Pradesh, India, to offer Master's and 
Ph.D. programs.'' I assume that this statement is based on news 
accounts in the Indian press, and I would like to respond by noting 
that from Georgia Tech's perspective, the description by the Indian 
press of this project was somewhat premature. What we have actually 
agreed to is non-binding discussions that could culminate in a 
potential research and graduate education platform in Andhra Pradesh. 
However, as indicated above, we have a list of significant conditions 
that must be met, and we will not go forward until all of those 
conditions are met in Andhra Pradesh.
    So, I would like to focus this discussion on the three 
international research and education platforms that we already have in 
operation: Georgia Tech Lorraine in Metz, France; Georgia Tech's 
program in Singapore; and Georgia Tech Ireland. Georgia Tech Lorraine 
is the oldest, established in 1990, and the most fully formed. It 
includes graduate and undergraduate education programs, research 
operations, and a ``franchise'' of Georgia Tech's business incubator. 
Our program in Singapore is younger and smaller, with research and 
graduate programs in conjunction with the National University of 
Singapore and Nanyang Technical University. Georgia Tech Ireland opened 
in June of 2006 in partnership with the Industrial Development Agency 
of Ireland and in collaboration with seven Irish research universities. 
This newest international site has begun as a research program and as 
yet has no educational component.
    The research strengths and interests of each of these locations 
align well with Georgia Tech's research strengths and interests, and 
the primary driver for establishing these international platforms is 
enhanced research opportunities that provide a strategic complement to 
the major research thrusts on which Georgia Tech is focused. These 
campuses are mutually beneficial partnerships. In each case, we are 
there because we were invited based on our own strengths and interests. 
In each case, we are given indigenous support and have access to 
research funding from indigenous sources. In each case, we stand to 
gain from the research expertise represented by these locations.
    For example, France has a high level of expertise in aspects of 
network security. Georgia Tech's campus in Metz, France, is a research 
partner with Centre National de la Recherche Scientifique, the French 
National Center for Scientific Research, which is the largest and most 
influential research agency in Europe. Our unique joint international 
research unit with CNRS is focused on secure and high-speed 
telecommunications and provides us with rapid access to French research 
and technology that would otherwise not be available to Americans. 
Georgia Tech Lorraine has strong research connections to the main 
campus in Atlanta, and we stand to gain from what we can learn there to 
the benefit of the state of Georgia and the United States.
    Georgia Tech Lorraine is an ``affiliate'' of Georgia Tech rather 
than a branch campus. It is supported by the governments of Lorraine 
and Metz and has partnerships with several national research 
organizations, ten other European universities in France and elsewhere, 
and several French corporations. Its graduate enrollment approaches 175 
students, and it has granted close to a thousand Master's degrees to 
date. The undergraduate program at Georgia Tech Lorraine began as a 
summer study program for our Atlanta-based students, offering 
engineering majors a unique opportunity to study abroad while keeping 
up with their curriculum. By summer of 2006, the program had more than 
150 students and 14 professors teaching dozens of courses. In the fall 
of 2006, we began a very small year-round undergraduate program in 
electrical and mechanical engineering and computer science, which we 
hope to grow to more than 50 students by 2008.
    Similarly, one of the world's premiere locations for experience and 
expertise in logistics is Singapore. Georgia Tech has long been 
recognized as the top university in the United States in systems 
engineering and logistics, which have become increasingly critical as 
the economy has grown increasingly global. However, there are aspects 
of logistics--transportation, for example--in which Singapore as the 
world's busiest port is more advanced than we are. Again, Georgia 
Tech's program in Singapore has a very strong research connection to 
the Atlanta campus, and we stand to gain from what we can learn there 
to the benefit of the state of Georgia and the United States.
    Georgia Tech's Singapore platform has a comprehensive supply chain 
research program and the first Master's degree program in the region in 
logistics and supply chain management. In addition to research 
opportunities for Georgia Tech's faculty in systems engineering and 
logistics, it provides a critical component of Georgia Tech's executive 
Master's degree program in international logistics, which is based in 
Atlanta. In Singapore, Georgia Tech also offers a THINK Series, which 
includes seminars, workshops, and short courses designed to bring 
together logistics experts, business executives, and academic leaders 
for discussion, knowledge dissemination, and thought leadership 
positioning. Georgia Tech's Singapore program is supported by five 
agencies in the Singapore government, with its primary research support 
coming from the Singapore Agency for Science Technology and Research 
(A*STAR).
    Georgia Tech's international platforms are directly involved in the 
international economic development activities of the State of Georgia. 
Georgia Tech was created in 1885 by State law to give the state an 
economic base and workforce in science and technology, and we have been 
actively involved in economic development activities since our 
inception. Georgia's State Department of Economic Development is 
located on the edge of the Georgia Tech campus in Atlanta, adjacent to 
Georgia Tech's own business and economic development outreach 
activities, and there is close collaboration. In particular, Georgia 
Tech has a full-time international specialist on its staff of economic 
development advisors whose job is to help the state take advantage of 
the economic development opportunities presented by Georgia Tech's 
international activities. For example, in September of 2005, Georgia 
Governor Sonny Perdue and Lorraine President Jean-Pierre Masseret 
signed a formal agreement that opened the way for technology companies 
from both places to develop business relationships with each other. The 
lynchpin of the agreement is Georgia Tech Lorraine, which will help 
French companies make business contacts in Georgia and give Georgia 
companies a platform to develop operations in Europe. Similarly, within 
a year of the opening of Georgia Tech Ireland in June of 2006, Ireland 
President Mary McAleese had visited Atlanta and the Georgia Tech 
campus, and Georgia Governor Sonny Perdue had made an economic 
development trip to Ireland. The City of Atlanta has always been a 
transportation hub, and a 2001 Clusters of Innovation study of the city 
by the Council on Competitiveness helped the local business community 
better understand the economic opportunities presented by logistics. 
The Metro Atlanta Chamber of Commerce has now launched a logistics 
initiative aimed at expanding this sector of the city's economy, which 
is benefiting from Georgia Tech's presence in Singapore.
    It is very important for our faculty to have an international 
perspective on their area of expertise, and many of our Atlanta-based 
faculty spend time on our international campuses. Their time abroad 
allows them access to international opportunities without disrupting 
their research or career trajectories, and allows us to help ensure a 
positive experience for their spouses and children. It simultaneously 
enriches them professionally and helps to assure the consistency and 
quality of the Georgia Tech reputation at our international locations.
    Georgia Tech's international campuses also represent an important 
opportunity for our students. As the Nation's largest producer of 
engineers and one of its best, we face the challenge of preparing our 
students to contribute to and compete in a global economy based on 
innovation. It is clear to us that it is in the best interests of the 
United States economy for our education programs to produce citizens of 
the world who are comfortable with diverse cultures, languages, and 
ways of thinking and solving problems. Although Georgia Tech is a 
global institution at both the graduate and undergraduate levels, most 
of the undergraduate experience is campus-based in Atlanta or Savannah, 
Georgia. The hands-on lab and practicum nature of science and 
engineering curricula make study abroad difficult to accommodate, but 
we have nevertheless developed a wide array of international 
opportunities for our undergraduate students. During the course of 
their studies, more than one-third of our undergraduate students study 
or work abroad, some of them more than once. Seventeen undergraduate 
degree programs offer an International Designator, in which a context 
of global economics, international affairs, and foreign language is 
added to the program of study. Almost 40 percent of Georgia Tech's 
undergraduates study foreign languages, despite their not being 
required for any major save one, modern languages. This level of 
international exposure for our students is sustained through our own 
study abroad and internship programs; through dual degree agreements 
with the Technical University of Munich in Germany, the Technical 
Institute of Monterrey in Mexico, Imperial College in England, and 
Shanghai Jiao Tong University in China; and through opportunities on 
our international campuses.
    Feedback from alumni and strong employer interest in our students 
indicate the value of an international perspective to their education. 
In a 2005 survey, young alumni reported that the experience had helped 
them develop leadership skills, made them more comfortable in a 
culturally diverse environment, and enhanced their ability to resolve 
disagreements and mediate interpersonal conflict in teams or groups. We 
believe these are important skills for our graduates and increase their 
ability to thrive in a global economy. The value of our students' 
education is also reflected in the strong interest by the 550 corporate 
and government recruiters who came to campus to conduct nearly 10,000 
job interviews during the past academic year. Some interviewed students 
as early as six months before they graduated in an effort to get a jump 
on the competition.
    At Georgia Tech, we also believe that the technological research 
university of the 21st century will lead the way in improving the 
quality of life for all of the Earth's inhabitants, and our faculty and 
students are actively engaged in this endeavor. The nation of Liberia, 
struggling to recover from a devastating civil war, recently announced 
a new national information and communication technologies policy, 
developed with the assistance of Georgia Tech Public Policy Professor 
Michael Best and graduate students in public policy and computing. 
Civil and Environmental Engineering Professor Aris Georgakakos has 
worked with multiple nations to develop water management plans for many 
of the world's largest river systems. Civil and Environmental 
Engineering Professor Joseph Hughes and his students are helping the 
nation of Angola with water resource problems, while Research Scientist 
Kevin Caravati led a student team in the development of a solar-powered 
dry latrine that can be made from local materials to promote sanitation 
in Bolivia. City Planning Professor Michael Elliott has trained 
environmental experts from both Israel and Palestine in methods of 
resolving conflicts over water, a critical resource that plays a role 
in the political tensions of the Middle East. These are just a few 
examples of many faculty and students whose efforts are making a 
difference around the world. We believe that quality of life and 
economic opportunity promote political stability, which is to the 
advantage of the United States as well as the nations we assist.
    Finally, it is important to understand that the process of 
establishing international platforms is a two-way street, and Georgia 
Tech's international character is an important factor in attracting 
foreign research labs to Atlanta. For example, in 2005 the Samsung 
Electro-Mechanics Company located a research lab adjacent to our campus 
that is working on the next-generation radio-frequency integrated 
circuit. This lab is expected to become the company's primary North 
American research location. Later the same year, Milan-based Pirelli 
located a North American branch of Pirelli Labs, the company's advanced 
research center, adjacent to our campus, and then consolidated the rest 
of its North American corporate staff activities to the same location. 
These undertakings are consistent with data reported by the National 
Science Foundation in the 2006 Science and Engineering Indicators. 
According to NSF, from 1997 to 2002, R&D investments made in the United 
States by foreign firms grew faster than R&D investments abroad by 
U.S.-based multinational corporations. In 2002, U.S. affiliates of 
foreign companies accounted for 5.7 percent of the total U.S. private 
industry value, but R&D conducted by U.S. affiliates of foreign 
companies accounted for 14.2 percent of the industry R&D conducted in 
the United States.
    In summary and response to the specific questions posed:

1.  What was the general motivation for your institution to establish 
branch campuses overseas? What factors did you consider in making the 
decision to expand overseas, especially in terms of locations, costs, 
staffing, and the impact on the home campus?

    Georgia Tech's primary motivation in establishing overseas campuses 
is to enrich our research thrusts and leverage research expertise 
available in other parts of the world and prepare our students to 
thrive in the global economy. Our international platforms are mutually 
beneficial partnerships with high-quality international partners whose 
research interests align with ours. They benefit our university by 
enabling our faculty to operate in a global context and helping our 
students prepare to thrive in a global economy. They benefit the state 
of Georgia directly by serving as conduits for international economic 
development relationships. They are operated in accordance with the 
laws of the United States and the host country; accreditation 
standards; and Georgia Tech's own charter, by-laws, and policies. They 
are designed to be financially self-sustaining, so that tax revenues 
are not used nor are resources diverted away from other Georgia Tech 
programs. As a result, they are not technically ``branch'' campuses in 
the financial sense, because they will have no financial impact on the 
home campus.

2.  What do you anticipate the effects of these overseas branch campus 
programs will be on the overall global science and technology 
enterprise, especially in terms of jobs available to your home and 
branch campus graduates? What sorts of data and information are you 
collecting to determine if the effects are matching your original 
goals?

    Our overseas campuses offer us an opportunity to participate in 
research with partners whose expertise exceeds ours in particular areas 
and allows us access to international research opportunities and 
technologies that would otherwise be unavailable to Americans. 
Specifically in terms of our graduates, these campuses enrich our 
ability to produce citizens of the world, educated by professors who 
operate in an international context and presented with opportunities to 
study abroad that are not available to typical engineering and science 
students. The importance of these opportunities to our students is 
reflected in the strong interest by corporate and government recruiters 
in hiring them and in reports from our graduates themselves, who say 
that their international experiences as students contribute to their 
careers in significant ways.

3.  How are you adjusting your home campus science and engineering to 
better respond to the increasingly globalized economy?

    Georgia Tech aspires to be a truly global university that 
contributes to the economic competitiveness of Georgia and the United 
States through partnerships with other top international universities 
and research organizations that provide access to innovations and 
technology being developed in other parts of the world. The faculty and 
students of our home campus participate in these partnerships, and the 
knowledge and experience they gain enrich Georgia Tech's home campus 
and carry over into the relationships we have with American industries 
and with international partners who seek us out and create partnerships 
with us here in Atlanta. Georgia Tech is also committed to 
strengthening the international elements of the education we offer our 
students, and we have added an International Designator to many 
undergraduate majors, incorporating a global context into the course of 
study.

                      Biography for Gary Schuster
    Dr. Schuster is currently Provost and Executive Vice President for 
Academic Affairs and the Vasser Woolley Professor of Chemistry and 
Biochemistry at the Georgia Institute of Technology. Previously, he 
served as Dean of the College of Sciences.
    Dr. Schuster holds a BS in Chemistry from Clarkson College of 
Technology (1968) and a Ph.D. in Chemistry from the University of 
Rochester (1971). After twenty years in the Chemistry Department at the 
University of Illinois, he became Dean of the College of Sciences and 
Professor of Chemistry and Biochemistry at Georgia Tech in 1994. He was 
a NIH Post Doctoral Fellow at Columbia University, a Fellow of the 
Sloan Foundation and a Guggenheim Fellow. He has been awarded the 2006 
Charles Holmes Herty Medal recognizing his work and service 
contributions since his arrival at Georgia Tech.
    Dr. Schuster has published more than 230 papers in peer reviewed 
scientific journals on topics ranging from biochemistry through 
physical chemistry. One of his best-known discoveries is called 
Chemically Initiated Electron Exchange Luminescence. It provides the 
mechanistic basis that allows the understanding of the bioluminescence 
of the North American Firefly. This discovery forms the basis for new 
clinical diagnostic procedures that have recently been commercialized.
    His current research interests focus the interaction of light with 
matter and investigation of small molecules that bind and cut DNA 
selectively when irradiated with light. This work has application to 
understanding the origin of certain diseases, such as cancer, and 
aging.
    Dr. Schuster and his wife, Anita, have two sons, a granddaughter, 
and grandson. Eric lives in Atlanta and Andrew lives in Chicago, 
Illinois. Their family enjoys downhill skiing and travel.

    Mr. Baird. Dr. Schuster, thanks for your remarks. You will 
recognize, of course, you have been joined by a fellow Georgian 
on the dais here, Dr. Phil Gingrey. Thank you, Dr. Gingrey, for 
joining us.
    Mr. Wessel, thank you.

STATEMENT OF MR. MARK G. WESSEL, DEAN, H. JOHN HEINZ III SCHOOL 
  OF PUBLIC POLICY AND MANAGEMENT, CARNEGIE MELLON UNIVERSITY

    Mr. Wessel. Chairman Baird, Ranking Member Hall, Members of 
the Committee, thank you very much for this opportunity to 
submit my thoughts on the topic of the university role in the 
globalization of innovation, research, education, and 
development. It is a consuming issue for almost every major 
American university campus today.
    One might legitimately wonder why a Dean of a policy school 
is testifying before a Committee on Science and Technology. I 
guess I have two answers to that question. One is, at Carnegie 
Mellon, we think of policy as a science as well as an art, but 
the other is probably half of what we do at the Heinz School 
involves information technology management, both in our 
research and education programs. And it is these programs, more 
than any other that we have, that are driving our globalization 
efforts at the Heinz School.
    But this globalization, while I believe it to be a 
tremendously beneficial impact for our institutions and for the 
United States economy, it does challenge us to answer critical 
questions about the impact of our efforts, on the American 
economy, the effect on the generation of new technology and 
innovation for our citizens, and our obligations as 
institutions to people, culture, societies, and economic 
systems beyond our borders.
    What is new, generally, in my opinion, about what is 
happening, is that American universities, while they have 
always had a strong international connection among faculty for 
research and in our student body, today universities are 
engaging the issue of becoming global institutions as part of 
our overall strategies.
    There are many forces driving this, but I see three primary 
forces. One is, of course, the increasing globalization of 
economic and policy activity around the world. The second is 
that the American tertiary education system has been globally 
recognized as a driver of economic success, and increasingly, 
governments and businesses are coming to us from around the 
world to access that expertise. And finally, there are clearly 
competitive forces in our industry, which increasingly require 
us to be entrepreneurial to support the kind of quality and 
research and education which has been our hallmark for decades.
    Beyond these general forces, what any university or college 
chooses to do on this front is a manifestation of that 
institution's particular circumstances, capabilities, and 
values. My university has made great strides in becoming a 
global institution. In 1997, other than study abroad programs, 
we offered only one academic program outside the United States. 
Today, we offer 12 different degree programs in 10 countries, 
and have institution building, joint degree program, and formal 
collaborative research activities in Singapore, Taiwan, India, 
China, and Portugal. Additionally, we have official presences, 
which can be characterized as branch campuses, in Greece, 
Qatar, Japan, and Australia. And that list is growing, and I 
expect it to grow in the future.
    It is important, then, to point out that there is no single 
model that is optimal as an instrument to achieve our goals. We 
evaluate every global opportunity according to its ability to 
support us in achieving the following objectives: building 
alignment with the important organizations and individuals who 
are leaders in the global economy and policy environment; 
reaching new student markets that are unlikely to access our 
education by coming to Pittsburgh; create opportunities for our 
existing students to expand their professional education 
through integrated professional experiences abroad; improve our 
curriculum by broadening our exposure to global policy and 
business issues; build a globally aware faculty with an 
institutional environment capable of supporting intellectual 
inquiry into the emerging issues posed by globalization; and 
finally, to create new sources of revenue that can support our 
activities both abroad and at home.
    You have rightly asked what outcomes we expect from our 
efforts to become global institutions. This is a new activity 
and a bold activity for institutions like mine. Nevertheless, 
we have some expectations. We expect increased recognition 
around the world of the potential constructive impact of our 
institution on the efforts of societies to fulfill the 
aspirations of their people, and a consequent increase in our 
brand equity. We expect increased financial support for our 
efforts from both public and private sector entities that are 
convinced of this value. We expect the ability to deliver 
education to highly qualified students whom we would not have 
been able to serve previously. We expect improved quality of 
education for all of our students, as we modify our curricula 
to reflect what we learn in partnerships around the world, and 
provide opportunities for true professional development in 
these contexts. We expect better research and innovation 
outcomes, as we expand our reach to include new intellectuals 
from around the globe, and we expect the ability to experiment 
with and learn from new models and modes for research and 
education in a highly decentralized and distributed 
environment.
    I would now like to briefly take a moment to address an 
important issue, which I know has been of concern to the 
Committee. As universities become more global, we are 
effectively, if unintentionally, increasing the capacity of 
firms and individuals abroad, to do jobs currently done here in 
the United States. That is an arguable point, but it is my 
opinion that although this effect is likely to be quite small, 
it deserves an honest answer, and that honest answer is that it 
probably is so. Nevertheless, I think that it is also my 
opinion that in aggregate, the benefits to the U.S. economy and 
to American workers from our activity far exceeds the cost. 
Ultimately, our global efforts will create jobs in the United 
States through improved education and innovation in our 
institutions.
    Without taking too much time, we believe the benefits will 
come in four primary forms: more innovation as a result of our 
ability to build more vibrant networks of intellectuals, 
drawing on high human capital individuals around the globe; 
graduates who are better trained to lead innovation in global 
business and policy enterprises of the future; more resources 
generated through our international efforts to support our 
institutions as a whole; and better, more outward-looking 
universities that are more connected to business and society, 
and have a greater ability to transfer knowledge outside their 
walls.
    In my view, this globalization effort is simply a part of a 
broader movement in academia to reach out and become more 
engaged with companies, governments, and societies, and to be 
more directly concerned about the responsiveness of our efforts 
to the needs of society.
    As evidence of this, Carnegie Mellon has not only gone 
abroad, it has gone to the West Coast. We now have a West Coast 
campus in the Bay Area that responds to that area's technology 
hotbed there. And my school, the Heinz School, has a new campus 
in Los Angeles to respond to the film industry, and will be 
opening a campus in Washington, D.C. within a year, to be more 
tied to our national policy mechanism.
    Perhaps I have persuaded you, but perhaps not. Well, one 
thing I would like to say in closing is that Chairman Baird 
mentioned The Economist report that had 17 of the top 20 global 
universities coming from the United States.
    But we are not immune to competition. If we ask what 
happens if we don't do this, I think the answer for us as 
institutions is actually quite grim. In 20 years, if we do not 
assiduously pursue globalization, I think you can easily expect 
half of the institutions that we see today in the top 20 to 
drop out. This would ultimately provide serious damage, both to 
the U.S. economy and to the U.S. political system.
    Thank you very much.
    [The prepared statement of Mr. Wessel follows:]
                  Prepared Statement of Mark G. Wessel
    Chairman Gordon, Ranking Member Hall, Members of the Committee. 
Thank you for this opportunity to submit my thoughts on the topic of 
the university role in the globalization of innovation, research and 
development. It is a consuming issue on almost every major American 
university campus today.
    I am Mark Wessel, Dean of the H. John Heinz III School of Public 
Policy and Management at Carnegie Mellon University. As many of you are 
aware, Carnegie Mellon University is one of the Nation's leading 
private research universities. The university consists of seven schools 
and colleges with more than 10,000 students and more than 4,000 faculty 
and staff. Founded in 1968, the School of Urban and Public Affairs 
(SUPA) set as its purpose an aggressive effort to understand the causes 
of critical problems and to train individuals to use knowledge and 
technology to bring about positive change. In April of 1991, SUPA 
became the H. John Heinz III School of Public Policy and Management in 
honor of the late Pennsylvania Senator H. John Heinz III. The Heinz 
School is consistently rated as one of the premier public policy 
schools in the Nation.
    The globalization of R&D and innovation is critical to the future 
not just of our institutions but of the economic success of the United 
States. It also challenges us to answer a critical question about our 
obligations as institutions to people, cultures, societies and economic 
systems beyond our borders.
    To my knowledge, no university has ``solved'' this challenge. We 
each proceed in idiosyncratic ways based on our individual cultures, 
needs, capabilities and existing positions in the global marketplace. 
This is as it should be. Experimentation breeds innovation and the 
competition among these experiments will ultimately determine which 
models are most likely to be successful. Still, ultimately we must find 
ways to share information about our many individual experiments and 
gain a collective understanding on how to capitalize effectively on the 
opportunity globalization provides to enhance our capability to achieve 
our core mission--the advancement of knowledge and the training of 
citizens for productive roles in society. The efforts of this committee 
to understand this activity in universities can be critical in that 
process of coming to consensus.
    The Heinz School and Carnegie Mellon have long been known for 
fostering practical problem-solving in an interdisciplinary environment 
that blends technology and the sciences with the arts, humanities, 
business and policy. Without question, innovation and collaboration 
characterize our success. Now more than ever, these strengths match up 
with important, emerging needs in our complex world.
    I would like to specifically highlight the great strides the 
university has made globally. In 1997, the university offered just one 
academic program in three countries outside of the United States. 
Today, it offers 12 degree programs in 10 countries and has student 
exchange and joint-degree programs in Singapore, Taiwan, India, China, 
and Portugal. Additionally, we have an official presence in Athens, 
Qatar, Kobe, and Australia. My college participates directly in three 
of these four ``branch campuses.''

General Forces Influencing University Globalization Initiatives

    You have asked us to comment on what is driving efforts by our 
universities in responding to globalization. Let me start by saying 
what is NOT driving this effort. Over the last 50 years there has been 
no lack of global collaboration in research. Particularly at the level 
of the individual researcher, international collaborations to advance 
knowledge and spur innovation have been profoundly important and often 
unnoticed components of the engine of the American university 
innovation machine. There has been no shortage of willingness of 
researchers across the globe to seek out others in their fields that 
can advance their understanding of problems of interests. In addition, 
particularly at the graduate level, major American universities have 
typically been open and welcoming environments for foreign students 
coming to seek the benefits of our educational system. In both these 
senses, American universities have always been intimately tied to a 
global system of innovation and knowledge transfer.
    The difference today is that the institutions that are these 
researchers' and students' homes are deeply engaged in the process of 
globalizing as institutions. The process of engaging global economic 
and social systems is becoming part of the strategy for universities, 
not simply an outcome of what we do. This has taken many, many 
different forms. But the forces that are driving these efforts are 
reasonably clear.

Globalization of Economic Systems and the Public Good

    One of the realities we face as universities is that the 
fundamental conditions around our value proposition have changed on 
several dimensions. For much of the latter part of the 20th Century 
governments at both the State and federal level accepted the 
proposition that universities were a ``public good''--i.e., that the 
research and education output of American universities would make the 
society stronger in ways that would not be captured if not for the 
public subsidy. While this basic proposition is still accepted, the 
degree to which the public sector is willing to provide subsidy for 
this activity has declined--at least relative to the overall cost of 
providing these outcomes.
    The implication is that (if we are smart) we must be far more 
conscious of the value added we generate that customers will pay for. 
And the nature of those customers' needs has changed fundamentally as a 
result of globalization. Every business of any scale has been 
transformed by technology-driven global supply chains, by the emergence 
of new competitors in every market and by the increased need for 
continuous process and product innovation--innovation that can now come 
from anywhere and anybody. Responding to the needs of these 
organizations requires us to change much about the way we do things. It 
is not sufficient that we just study the phenomena driving economic 
globalization. Because of the rapidity of change in this environment 
(often driven by rapid change in technology), we must partner with 
firms to determine the sources of potential innovation. Moreover, those 
firms are no longer North American or European firms. Being present (or 
at least more proximate) with these new players in the world economy is 
critical.
    This new economic system has other important implications for our 
students. For our traditional base of international students the 
advantages of coming to the U.S. for a university education are 
diminishing--not because the quality of our education or employment 
opportunities are declining but because the quality of those options in 
their home countries are improving. As emerging economies generate 
globally competitive industries, the opportunity for students from 
those countries to build their careers in their home countries 
increases and the relative value of access to U.S. labor markets (a 
traditional motivation for international students) declines. As foreign 
countries invest increasingly in tertiary education of high quality, 
the difference in the value added of our education relative to theirs 
declines.
    For U.S. students, the likelihood that you might spend your entire 
professional career in the United States has declined. Education MUST 
become more global to accommodate the demands of their careers. And 
this ``globalization'' of education is fundamentally different than the 
traditional mode of staying at home and studying international business 
(with a possible semester abroad). It requires, at least to some 
degree, the ability to actually study their professional fields in the 
contexts in which they will practice.
    Finally, this new economic system and the rapidity of innovation 
and change that drive it require the ability for firms to upgrade the 
skills of their employees more or less continuously. And because the 
value in the marketplace of human capital is higher than ever, this 
requires universities to deliver this capacity where the employees are 
globally resident rather than requiring them to come to us exclusively. 
While distance learning can serve some of these needs, it cannot meet 
them all for any of a number of reasons.
    The demand of our mission that we serve the public interest 
generates even more impetus for us to include globalization in our 
strategic objectives. For all intents and purposes, there are no 
domestic policy issues any longer. The interconnectedness of economies, 
societies and the welfare of individuals cannot and should not be 
undone. Understanding the ways in which this interconnectedness will 
change our view of how good policy is made is critical. Moreover, our 
society depends on the willingness and ability of emerging societies to 
develop modern systems of governance--systems that are responsive to 
their internal constituents, weigh alternatives rationally, are 
invested in the future of the global economic system and are informed 
of the collective as well as the parochial interests in policy-making. 
For universities to contribute to the emergence of rational governance 
we will need to view ourselves as partners with the individuals and 
institutions in theses societies that are moving in that direction. I 
believe that requires physical presence.

The World Has Come to Us

    The second force influencing American universities' desires to ``go 
abroad'' is that the world is adopting our model of tertiary education. 
Many governments around the world have come to recognize the role the 
American tertiary education system has played in supporting the 
innovation and productivity that have generated the most powerful 
economic system ever known. Public and even private investment in what 
aim to be high quality university systems around the world is truly 
impressive. This creates both opportunities and threats for us. The 
opportunities come because many of these governments have come to our 
universities for assistance in establishing these systems. These new 
institutions will become increasingly effective, they will become 
centers of innovation and knowledge creation in their own rights and 
our faculty and students will increasingly benefit from connection to 
them. Moreover, these institutions will create cadres of individuals 
with significantly higher capabilities that we might then engage in our 
own pursuits. My view is that the more assiduously we pursue 
institutional relationship with these new entities, the more likely our 
faculty and students are to benefit from their emergence.
    But, of course, these new institutions are or will be competitors. 
They will inevitably compete with us for the faculty, students and 
resources that support us. Our advantage is that if we can assist these 
societies in fulfilling the role they might otherwise fill by creating 
new competitors we will be better off. And to the extent that requires 
us to modify how we do things to accommodate the local demands of these 
societies, the richer we will become as institutions on every 
dimension.

Our Industry Structure Will Change

    My provost and former dean of the Heinz School, Mark Kamlet, is 
fond of saying that higher education is the last service industry in 
the world to undergo major structural change--but it is coming. 
Arguably, there are simply too many universities in this country. To 
put it another way, if we were largely for-profit institutions one 
would likely see significant merger activity in our sector. What that 
means for our discussion, I believe, is that the emergence of new 
markets abroad--i.e., markets that can't easily be accessed in our 
traditional educational and research delivery models staying at home--
offer opportunities to take advantage of inherent economies of scale 
without jeopardizing the branding and selection fundamentals of our 
business model at home. Thus, for many of us, going global is simply 
efficient.
    These are, in my mind the three most important general factors in 
driving the push for American universities to seek opportunities 
abroad. Of course, this is all enabled by advances in communication 
technology that in innumerable ways have facilitated building global 
institutions in many endeavors of life.

Specifics of the My Institution's Efforts

    Beyond those general principles, what any university or college 
chooses to do on this front is a manifestation of that institution's 
particular circumstances, capabilities and values. I will speak with 
respect to the goals, objectives and strategies of the Heinz School but 
will reference broader activities at Carnegie Mellon. The Heinz School 
is a graduate professional school with two major areas of emphasis: a) 
public policy analysis and implementation; and b) information systems 
management and strategy. Our core aspiration in pursuing our 
globalization effort is to have a significant impact on both the 
evolution of the global IT-driven economy and to influence the process 
and structure of governance in emerging societies that have and will 
become such an integral part of this global system. We believe our 
comparative advantages are a commitment to objective, empirically 
driven, interdisciplinary inquiry and education and a commitment to 
innovation to produce value added for our constituents.
    It should also be said that there is no single model that we 
believe is optimal as an instrument to achieve our goals. In reality, 
the replication of the model represented by our home campus in anything 
like the scale of the original has so far proven impractical and far 
too risky for our tastes and resources. At Carnegie Mellon, we do have 
what might commonly be referred to as ``branch campuses'' but they are 
smaller and more specialized than our home campus. However, we have 
sought to build real presence in the other nations I previously 
mentioned through a very wide variety of other means.
    We evaluate every global opportunity according to its ability to 
support us in achieving the following objectives:

        1.  Build alignment with the important organizations and 
        individuals who are leaders in the global economy and policy 
        environment;

        2.  Reach new student markets that are unlikely to access our 
        education by coming to Pittsburgh;

        3.  Create opportunities for our existing students to expand 
        their professional education through professional experiences 
        abroad;

        4.  Improve our curriculum by broadening our exposure to global 
        policy and business issues;

        5.  Build a globally aware faculty with an institutional 
        environment capable of support the broadest possible 
        intellectual inquiry.

    Of course, this is not an unconstrained problem. The primary 
constraints we pay attention to are:

        1.  The constraints on the managerial capacity of a small 
        institution to deal with issues generated by a globally 
        distributed organization;

        2.  The absolute need for every global venture (and all 
        ventures collectively) to exhibit a high probability of 
        positive financial returns and very low down-side financial 
        risk;

        3.  The necessity of maintaining quality standards in research 
        and education consistent with our home campus.

    You have rightly asked what outcomes we expect from our efforts to 
become global institutions. Ultimately, I believe that this is a bold 
but necessary activity whose full dimensionality will not be known for 
some time. Nevertheless, we expect some or all of the following to 
result if we are successful:

        1.  Increased recognition around the world of the potential 
        constructive impact of our institution on the efforts of 
        societies to fulfill the aspirations of their people and a 
        consequent increase in our ``brand equity'';

        2.  Increased financial support for our efforts from both 
        public and private sector entities that are convinced of this 
        value;

        3.  The ability to deliver education to highly qualified 
        students whom we would not have been able to serve previously;

        4.  Improved quality of education for all our students as we 
        modify our curricula to reflect what we learn in partnerships 
        around the world and provide opportunities for true 
        professional development in these contexts;

        5.  Better research outcomes as we expand our reach to include 
        new intellectuals from around the globe;

        6.  The ability to experiment with and learn from new models 
        and modes for research and education in a highly decentralized 
        and distributed environment.

    I believe that these outcomes that we expect as one institution 
reflect what we might hope to achieve collectively in this effort. We 
will produce citizens better equipped to deal with the changing 
economic environment that has accompanied globalization. We will build 
partnerships that will increase knowledge generation and facilitate its 
transfer to society. Our universities will be financially stronger and 
require less government subsidy. We will become more efficient 
individually as we leverage existing infrastructure. We will support 
innovation in firms that fuel global economic growth.
    These outcomes are difficult to measure. It is even more difficult 
to prove conclusively causal connections between university 
globalization efforts and these types of generalized social welfare 
outcomes. However, at the institutional level I believe we will be able 
to determine if we are successful. Successful global universities will 
have the following characteristics:

        1.  The number of our students who are able to spend portions 
        of their education at our facilities or partners abroad in 
        gaining education and experience in curricula and practicums 
        that are fully integrated across campuses will increase;

        2.  Revenues generated from activities abroad can be used to 
        support education and research at home campuses;

        3.  Our graduates will be sought out because of their ability 
        to translate what they have learned to solve global economic 
        and policy challenges;

        4.  We will have built a network of research partners with 
        multiple collaborations across faculty and institutions 
        globally;

        5.  We will have many private sector partners for whom our 
        educational offerings are an integral part of their training 
        and development efforts and who provide us with access to data 
        and intelligence about emerging issues in technology and 
        business;

        6.  We will have government and other academic partners around 
        the world who rely on our expertise in developing their 
        institutions and tertiary education systems, with whom we share 
        infrastructure for the benefit of our students and faculty, and 
        from whom we learn how our organization and system can adapt to 
        be more effective in their environments;

        7.  Our board of trustees and advisory committees will be 
        increasingly populated by influential business people and 
        policy leaders from around the world.

    Carnegie Mellon's globalization efforts have been a remarkable 
experience and we have learned much, even at this early stage. Largely 
because we are inexperienced at this, there have also been surprises--
particularly at how difficult this task proves to be. Some of the major 
challenges for our future efforts are predictable. Because we are 
generally not-for-profit organizations, we do not have access to the 
kinds of financial markets that are capable of providing risk capital 
to these kinds of ventures. Most of us can or will only tolerate a 
limited amount of financial risk in almost any venture. Hence we will 
be constrained in our ability to pursue many of our goals by the degree 
to which we can identify partners with philanthropic or public interest 
motivations willing to provide us with this kind of capital.
    A second source of challenge for us is that we have built a model 
for research activities that is dependent on a highly idiosyncratic 
environment and culture that is not well adapted to the global 
enterprise. At a policy level, many of the public agencies that fund 
research at universities will not fund foreign-based faculty--making it 
difficult to structure an integrated global research environment. Tax 
treatment for foreign-based research enterprises is uncertain, at best. 
Locally, our systems of supporting, evaluating and promoting faculty 
have relied heavily on a high degree of personal interaction and 
mentoring that is difficult to replicate in a global environment. To a 
significant degree, our educational programs have relied on extracting 
students from their homes and other productive activity to educate them 
in fairly isolated environments. Our management systems from finance to 
human resources to student services are all largely structure on the 
assumption of a geographically proximate environment.
    We are also challenged to adapt to a highly varied global 
regulatory environment. Each nation in which we consider operating has 
a different set of requirements with respect to the operation of 
tertiary education environment and in many of these countries the 
sector is completely closed to external entry. Even understanding the 
implications of these differing regulatory and policy environments is 
very challenging for us.
    Finally, the management challenges of inherently small institutions 
achieving global scale are truly daunting for us. This is more than a 
question of management and efficiency. Ultimately it is a question of 
whether we can globalize and still maintain the quality standards in 
research and education that has been the core of the success of 
American universities.
    Thank you for the opportunity to testify on this important topic. I 
would be happy to answer any questions the Committee might have.

                      Biography for Mark G. Wessel
    Mark G. Wessel has been named Dean of Carnegie Mellon University's 
H. John Heinz III School of Public Policy and Management, where he has 
served as Acting Dean since February of 2003.
    ``I am very pleased that Mark Wessel will assume the deanship. He 
will provide strong leadership and superb management skills. I look 
forward to continuing to work with him,'' said Carnegie Mellon 
President Jared L. Cohon.
    As Dean, Wessel will direct the school's academic programs in 
public policy and management, two university-wide information systems 
and technology management programs, and six research centers.
    Wessel, who came to the Heinz School in 1993, has served in 
administrative capacities such as Director of Health Care Programs, 
Associate Dean, Senior Associate Dean, and Chief Operating Officer.
    His responsibilities have included management of the operational 
functions of the Heinz School program development and management, 
development and oversight of the School's Master's programs in 
information technology management, and student advising.
    ``For more than a decade, Mark Wessel has provided consistent 
leadership and vision while serving the Heinz School in a wide variety 
of key posts,'' said Carnegie Mellon Provost Mark Kamlet, who was Dean 
of the Heinz School from 1994 to 2000. ``He will continue to build upon 
the Heinz School's strengths, particularly at the intersection of 
policy, management and information technology.''
    Wessel is a former economist and financial analyst for the United 
States Department of Energy. Prior to coming to Carnegie Mellon, he was 
a development specialist with the Mon Valley Initiative, where he 
developed community-based regional economic and social development 
strategies and projects for distressed communities in Western 
Pennsylvania.
    He served as Assistant to the Associate Dean and undergraduate 
economics advisor at the University of Wisconsin at Madison, where he 
earned his Master's degree in economics. Wessel earned a Bachelor of 
Science degree in Foreign Service from Georgetown University.
    Wessel is married to Linda C. Babcock, the James M. Walton 
Professor of Economics at the Heinz School. Also a former Acting Dean, 
Babcock specializes in research conducted at the interface between 
economics and psychology and received the Heinz School's Emil Limbach 
Award for teaching excellence in 1991.
    According to Wessel, ``if they want another dean in our family 
they'll have to get our five-year-old daughter, Alexandra!''
    An avid golfer, he is teaching his daughter the game and has been 
known to beat Mark Kamlet when they hit the links together. Wessel also 
loves sailing in the Caribbean, playing the classical guitar, and, 
according to his wife, has a passion for ``big, ugly cars.''
    In U.S. News and World Report Magazine's 2001 ranking of graduate 
schools in public affairs, the Heinz School ranked seventh overall and 
first in the specialty area of information technology. The Heinz School 
has built an international reputation for excellence in educational 
programs and faculty research.
    Its programs in information technology, criminal justice policy, 
policy analysis, finance and environmental policy are respected across 
the Nation and internationally as among the elite. Programs in health 
care and medical management, educational technology and other areas 
continue to grow and take national prominence.
    Heinz School graduates serve in key managerial positions across a 
wide range of government, business and non-profit organizations. The 
school still takes a flexible and interdisciplinary approach to teach 
students to look at societal problems from many different perspectives, 
using technology, quantitative and qualitative analysis and group 
dynamics to arrive at innovative solutions.

    Mr. Baird. Thank you, Mr. Wessel. Dr. Altbach.

 STATEMENT OF DR. PHILIP G. ALTBACH, DIRECTOR, THE CENTER FOR 
INTERNATIONAL HIGHER EDUCATION; J. DONALD MONAN SJ PROFESSOR OF 
                HIGHER EDUCATION, BOSTON COLLEGE

    Dr. Altbach. Thank you. Chairman Baird, Ranking Member 
Hall, and colleagues. My role this morning is to provide a bit 
of broader perspective. I am not here to talk about the efforts 
of my own university in internationalization, but to provide a 
broad perspective on what I think some of the key issues are.
    As my colleagues have said, the future of universities, of 
the excellent universities around the world, is a global 
future. There is no question about that. And if we, as 
institutions, and if we, as States and the Nation, don't take 
this seriously, we are going to fail in the future. So, that is 
key. We need to be globally competitive in higher education.
    Universities have always been international, indeed global, 
institutions. From the medieval universities, which used, we 
should remember, a common language of instruction, Latin, and 
which attracted foreign students and faculty, they didn't call 
them that in those days, they were truly global institutions.
    The United States, in fact, if you look at our higher 
education system, we have imported models from all around the 
world. Our university system is based, really, on three ideas: 
the British Colonial college, the German research university of 
the 19th Century, and the truly American idea of university 
service to society. Those are the three key elements that have 
shaped American higher education, and I should say, shaped the 
world's higher education today, because the American university 
is the global model. If you look around the world, and we all 
see every day, not every day, but frequently, colleagues from 
different countries coming to our universities and finding out 
how we do it, because we, in our higher education industry, are 
the gold standard today. So, that is very important.
    A few definitions which I think are important, because we 
bandy about globalization, internationalization, and so on, and 
we often don't define them carefully. What I mean, and what 
many scholars have talked about globalization to mean are the 
broad economic and social trends that affect the world 
environment, including, of course, information technology, the 
growing role and use of the English language, which I think 
gives us, in the U.S., a very significant advantage 
internationally in higher education, worldwide demand for 
access, and so on. These are factors over which we have little 
control, and which are part of the broader environment.
    What I mean by internationalization, and my colleagues have 
talked about aspects of this this morning, are the specific 
policies of governments, universities, schools, colleges, and 
even people, to adapt, define, and contribute to this global 
environment. Academic institutions, as well as states and 
nations, have different ideas about adapting to the global 
environment, and I would say, as a comparative educator, that 
if you look around the world, our major national competitors, 
deeply engaged in an academic foreign policy, are ahead of us 
in the U.S., in terms of thinking about their approaches, 
national approaches to higher education, exports to higher 
education policy, in a global environment.
    What is meant by multinationalization, and here is where 
branch campuses come in, multinationalization encompasses 
academic programs and institutions, including the branch 
campuses, that are offered by academic institutions in one 
country, in another. Some people have called this McDonald-
ization, and part of is franchising, in truly McDonald's 
fashion. Now, that is not what the universities represented at 
this table do, but there is some of that around the world, and 
it is important to watch, because all of the global trends, the 
international trends, are not of tremendously high quality 
today.
    Let me mention a few things, a few kind of, one particular 
case study that I know is of interest to this committee, and 
that is the interesting issue of branch campuses. There are, 
according to the rather incomplete research, at least 82 branch 
campuses that operate today around the world, and the number is 
probably significantly higher than that. The United States is 
the largest single country that contributes to the branch 
campus phenomenon, with approximately half. Branch campuses are 
largely a North to South phenomenon. That is, universities in 
rich countries are opening branch campuses in developing or 
middle income countries. Most branch campuses worldwide, with 
very few exceptions, operate in English overseas, even from 
countries like the Netherlands, which is not an English-
speaking country. Their branch campuses operate largely in 
English. With the opening of China and India, both highly 
complicated regulatory environments today, the branch campus 
phenomenon is likely to become even more important.
    What are the motivations, very briefly, to senders? To earn 
money? That is part of it. To build a brand image overseas. To 
help to recruit students from other countries to come to the 
home campus. To provide a destination for study abroad for our 
own students. And broadly, as part of an internationalization 
strategy.
    And finally, a couple of problems. The failure to earn 
money is a problem. The University of New South Wales in 
Australia just recently closed its branch campus in Singapore, 
after less than a year, and the expenditure of a very large 
amount of Australian money, and by the way, Singapore money, 
too, because enrollments were not what they wanted. The failure 
to maintain the standards of the home campus abroad. Again, the 
institutions at this table would not be part of that 
phenomenon, but it is there. It is important. How do we get our 
own faculty to go abroad to teach for periods of time? 
Difficulties of dealing with host governments and institutions. 
Regulatory environments overseas are quite difficult. Managing 
quality control at this end of things, through our accrediting 
system, which is used and very effective in contributing to the 
quality assessment and control within the United States, is 
less able to do that abroad.
    Well, these are some of the issues, and I hope I have 
provided at least a little bit of perspective to get our 
discussion going here this morning.
    Thank you.
    [The prepared statement of Dr. Altbach follows:]
                Prepared Statement of Philip G. Altbach

                   GLOBALIZATION AND THE UNIVERSITY:

                     REALITIES IN AN UNEQUAL WORLD

    Mr.Chairman, and Members of the Committee. Thank you for the 
opportunity to participate in this hearing. The broad theme of the 
internationalization of higher education has immense relevance for 
American colleges and universities and for U.S. leadership in higher 
education worldwide. It is the case that the United States has, 
overall, the best higher education system in the world, and that 
American ideas about higher education are influential worldwide. For 
this reason alone, we have a special responsibility to play a 
responsible role in international higher education. It is also the case 
that we cannot take our dominant position for granted--other countries 
are building higher education capacity and are aggressively moving into 
the global academic market.
    The analysis here is intended to provide a broad overview of 
internationalization trends. I define key terms and then analyze how 
these trends affect higher education in the international context.
    In the past two decades, globalization has come to be seen as a 
central force for both society and higher education. Some have argued 
that globalization, broadly defined as largely inevitable global 
economic and technological factors affecting every nation, will 
liberate higher education and foster needed change. Technological 
innovations such as the Internet, the forces of the market, and others 
will permit everyone to compete on the basis of equality. Knowledge 
interdependence, it is argued, will help everyone. Others claim that 
globalization strengthens worldwide inequality and fosters the 
McDonaldization of the university. All the contemporary pressures on 
higher education, from massification to the growth of the private 
sector are characterized as resulting from globalization. There is a 
grain of truth in each of these hypotheses--and a good deal of 
misinterpretation as well. This essay will seek to ``unpack'' the 
realities of globalization and the related concept of 
internationalization in higher education and to highlight some of the 
impact on the university. Academe around the world is affected 
differently by global trends. The countries of the European Union, for 
example, are adjusting to new common degree structures and other kinds 
of harmonization that are part of the Bologna process and related 
initiatives. Countries that use English benefit from the increasingly 
widespread use of that language for science and scholarship. Of special 
interest here is how globalization is affecting higher education in 
developing countries, which will experience the bulk of higher 
education expansion in the next two decades (Task Force on Higher 
Education and Development, 2000).
    From the beginning, universities have been global institutions-in 
that they functioned in a common language, Latin, and served an 
international clientele of students. Professors, too, came from many 
countries, and the knowledge imparted reflected scholarly learning in 
the Western world at the time. Since universities have always figured 
in the global environment, they have been affected by circumstances 
beyond the campus and across national borders. This reality is all too 
often overlooked in analyses of 21st century globalization. A long-term 
perspective when considering the university reveals the deep historical 
roots of the ethos and governance of universities. As Clark Kerr has 
noted, of the institutions that had been established in the Western 
world by 1520, 85 still exist--the Roman Catholic Church, the British 
Parliament, several Swiss cantons, and some 70 universities. The 
universities may have experienced the least change of these 
institutions (Kerr, 2001, p. 115).
    Today's globalization, at least for higher education, does not lack 
precedents. From the beginning, universities have incorporated tensions 
between national conditions and international pressures. While English 
now dominates as the language of research and scholarship, in the 19th 
century German held sway, as did Latin in an earlier era. Students have 
always traveled abroad to study, and scholars have always worked 
outside their home countries. Globalization in the 21st century is 
truly worldwide in reach--few places can elude contemporary trends, and 
innovations and practices seem to spread ever faster due to modern 
technology. But, again, similar trends have occurred in other periods 
as well.
    It is also the case that all of the universities in the world 
today, with the exception of the Al-Azhar in Cairo, stem from the same 
historical roots--the medieval European university and, especially, the 
faculty-dominated University of Paris. This means that the essential 
organizational pattern of the contemporary university worldwide stems 
from a common tradition--this is an important element of globalization. 
Much of the non-Western world had European university models imposed on 
them by colonial masters--academic systems in India, Indonesia, Ghana, 
and the rest of the developing world stem from common Western roots. 
Even those countries not colonized by Western powers--such as Japan, 
Thailand, Ethiopia, and a few others--adopted the Western academic 
model (Altbach & Selvaratnam, 1989). This is the case even where, as in 
China, well-established indigenous academic traditions already existed 
(Hayhoe, 1999).
    The American university itself, so influential worldwide, 
constitutes an amalgam of international influences. The original 
colonial model, imported from England was combined with the concept of 
the German research university idea of the 19th century and the 
American ideal of service to society to produce the modern American 
university. Foreign models were adapted to domestic realities in 
creative ways. As the European Union moves toward the harmonization of 
national higher education systems in the ``common European space,'' 
foreign influences again emerge--degree structures, the course-credit 
system, and other elements in modified form--to produce evolving 
academic patterns. Just as Japan adapted German academic models and 
some American traditions as it built its modern university system after 
1868, the European Union is looking to ``best practices'' worldwide in 
2004.
    Given the centrality of the knowledge economy to 21st-century 
development, higher education has assumed a higher profile both within 
countries and internationally because of its roles in educating people 
for the new economy and in creating new knowledge (Altbach, 1998a). As 
evidence, the World Trade Organization is now focusing on higher 
education. Currently, a debate is under way concerning the General 
Agreement on Trade in Services (GATS). Multinational corporations and 
some government agencies in the rich countries are seeking to integrate 
higher education into the legal structures of world trade through the 
WTO. These developments indicate how important universities and 
knowledge have become in the contemporary world (Larsen, Martin, & 
Morris, 2002; Knight, 2002; Altbach, 2002).
Definitions
    It will be useful to define some of the terms in the current debate 
about globalization. For some, globalization means everything--an 
inchoate catch-all for the external influences on society. For others, 
it includes only the negative side of contemporary reality. This essay 
examines the international environment of higher education and seeks to 
analyze how that environment affects national higher education systems 
and individual academic institutions. Thus, the focus is not on the 
detailed issues of the management of academic institutions--changing 
administrative structures or changes in the specific nature of academic 
appointments for example, although these may be influenced by global 
trends. Rather, we are concerned with how societies and universities 
have dealt with mass enrollments, privatization, and the new 
technologies, among others.
    In this discussion, globalization is defined as the broad economic, 
technological, and scientific trends that directly affect higher 
education and are largely inevitable in the contemporary world. These 
phenomena include information technology in its various manifestations, 
the use of a common language for scientific communication, and the 
imperatives of society's mass demand for higher education 
(massification) and for highly educated personnel, and the `private 
good' trend in thinking about the financing of higher education. 
Academe is affected by, for example, patterns in the ownership of 
multinational publishing and Internet companies, the investment in 
research and development worldwide, and international currents of 
cultural diffusion. These, and other, trends are part of 
globalization--they help to determine the nature of the 21st century 
economy and society. Although globalization is by no means a new 
phenomenon--the medieval universities were affected by the global 
trends of the period--it has increased salience in interdependent world 
of the 21st century. All are affected by these trends, and must take 
them into consideration as part of higher education policy and reality.
    Internationalization refers to specific policies and programs 
undertaken by governments, academic systems and institutions, and even 
individual departments to undertake student or faculty exchanges, 
engaged in collaborative research overseas, set up joint teaching 
programs in other countries or a myriad of other initiatives. 
Internationalism is not a new phenomenon and indeed has been part of 
the work of many universities and academic systems for centuries. With 
much room for initiative, institutions and governments can choose the 
ways in which they deal with the new environment. Internationalism 
constitutes the ways that contemporary academe deals with 
globalization. While the forces of globalization cannot be held at bay, 
it is not inevitable that countries or institutions will necessarily be 
overwhelmed by them, or that the terms of the encounter must be 
dictated by others. Internationalization accommodates a significant 
degree of autonomy and initiative (Knight, 1997; Knight, 2005; Scott, 
1998; De Wit, 2002).
    Another new trend in higher education trend is 
multinationalization, which refers to academic programs or institutions 
located in one country offering degrees, courses, certificates, or 
other qualifications in other countries. The programs are often 
sponsored jointly with local institutions, but this is not always the 
case (Teather, 2004). A joint-degree sponsored by institutions in two 
or more countries, often called ``twinning,'' is an example of a 
multinational academic enterprise. Offshore institutions constitute one 
variation of the trend--this may be carried out through franchising 
(sometimes referred to as ``McDonaldization'') or simply by opening a 
branch institution (Hayes & Wynyard, 2002). The American University of 
Bulgaria, offering U.S.-style academic programs in English in Bulgaria 
and accredited in the United States is an example. Increasingly, the 
Internet is used in the delivery of multinational academic programs.
    Globalization cannot be completely avoided. History shows that when 
universities shut themselves off from economic and social trends they 
become moribund and irrelevant. European universities, for example, 
ignored both the Renaissance and the Industrial Revolution and ceased 
to be relevant. Indeed, the French Revolution swept away the 
universities entirely. Napoleon established the grandes ecoles in order 
to provide relevant training for the leaders of society and to 
contribute to science and technology. Von Humboldt had to reinvent the 
German university model in 1809 in order to make them relevant to the 
development of science and industry in Prussia (Ben-David and 
Zloczower, 1962). Institutions and systems possess great latitude in 
how they deal with globalization and other social influences--at times 
they have effectively coped with such changes. At other times, the 
innate conservatism of academe prevented this. Thus, those who argue 
that there is just one model for higher education in the 21st century 
are clearly wrong.
Centers and Peripheries
    The world of globalized higher education is highly unequal.
    Concentrating on developing countries and on smaller academic 
systems immediately reveals the specter of inequality. While the 
Internet and other manifestations of globalization are heralded as 
disseminating knowledge equally throughout the world, the evidence is 
mixed on the outcomes. In some ways, globalization does open access, 
making it easier for students and scholars to study and work. But in 
many respects, existing inequalities are only reinforced while new 
barriers are erected. The debate in higher education mirrors analyses 
of globalization generally. Economists Joseph Stiglitz and Dani Rodrik, 
among others, have argued that in some respects globalization works 
against the interests of developing countries, reinforcing 
international inequalities (Stiglitz, 2002; Rodrik, 1997; Rodrik, 
1999). Neither is opposed to globalization--and both see it as 
inevitable--but their critiques reveal critical problems that tend to 
be overlooked in the dominant perspectives on the topic.
    The powerful universities and academic systems--the centers--have 
always dominated the production and distribution of knowledge. Smaller 
and weaker institutions and systems with fewer resources and often 
lower academic standards--the peripheries--have tended to be dependent 
on them. Academic centers provide leadership in science and scholarship 
and in research and teaching. They are the leaders with regard to 
organizational structure and mission of universities, and in knowledge 
dissemination. The centers tend to be located in larger and wealthier 
countries, where the most prestigious institutions benefit from the 
full array of resources, including funding and infrastructures--such as 
libraries and laboratories to support research, academic staff with 
appropriate qualifications, strong traditions, and legislation that 
supports academic freedom. The academic culture fosters high 
achievement levels by individual professors and students, and by the 
institutions themselves. These top institutions often use one of the 
major international languages for teaching and research, and in general 
enjoy adequate support from the state.
    The world of centers and peripheries is growing ever more complex 
(Altbach, 1998c). The international academic centers--namely the 
leading research-oriented universities in the North, especially those 
that use one of the key world languages (particularly English)--occupy 
the top tier. High quality universities do exist elsewhere--for 
example, in Japan and several smaller European countries. A number of 
universities in China, Singapore, and South Korea aspire to the status 
of top research institutions. Even within countries at the center of 
the world academic system in the early 21st century--the United States, 
Britain, Germany, France, and to some extent Australia and Canada--
there are many peripheral institutions. For example, perhaps 100 of 
America's 3,200 postsecondary institutions can be considered research 
universities. These institutions receive more than 80 percent of 
government research funds and dominate most aspects of American higher 
education. The rest of the American higher education system lies on the 
periphery of the research centers--these segments, including the 
comprehensive universities, community colleges, and others play 
important roles in both the academic system and in society--but they 
are not considered to be leaders in the academic system. While hardly a 
new development, this stratification has probably become more 
pronounced in recent years. Countries that had relative equality among 
universities are fostering diversification--the U.K. has created a 
ranked system, and Germany is moving in that direction.
    Other countries possess similarly stratified academic systems. 
There are also universities that play complex roles as regional 
centers, providing a conduit of knowledge and links to the top 
institutions. For example, the major universities in Egypt provide 
academic leadership for the Arabic-speaking world and are links to the 
major centers, while contributing relatively little themselves. China's 
key universities are significant producers of research, mainly for 
internal consumption, while at the same time serving as links to the 
wider world of higher education.
    In many ways, it is now more difficult to become a major player in 
international higher education--to achieve ``center'' status (Altbach, 
1998b). The price of entry has risen. Top-tier research universities 
require ever greater resources, and in many fields scientific research 
involves a large investment in laboratory facilities and equipment. 
Enabling institutions to remain fully networked for the Internet and 
information technology is also costly, as are library acquisitions--
including access to relevant databases. Universities in countries 
without deep financial resources will find it virtually impossible to 
join the ranks of the top academic institutions. Indeed, any new 
institution, regardless of location, will face similar challenges.
    Academic institutions at the periphery and the academic systems of 
developing and some small industrialized countries depend on the 
centers for research, the communication of knowledge, and advanced 
training. The major journals and databases are headquartered at the 
major universities--especially in the United States and the United 
Kingdom--since international scholarly and research journals are 
largely published in English. Most of the world's universities are 
mainly teaching institutions--in developing countries virtually all are 
in this category--that must look elsewhere to obtain new knowledge and 
analysis. Many smaller developing countries, for example, lack the 
facilities for research, do not provide degrees beyond the Bachelor's, 
and are unable to keep up with current journals and databases due to 
the expense. Structural dependency is endemic in much of the world's 
academic institutions.
A New Neocolonialism?
    The era of the Cold War was characterized by the efforts of the 
major powers to dominate the ``hearts and minds'' of the peoples of the 
world. The Soviet Union, the United States, and others spent lavishly 
on student exchanges, textbook subsidies, book translations, 
institution building, and other activities to influence the world's 
academic leaders, intellectuals, and policy-makers. The goals were 
political and economic, and higher education was a key battlefield. The 
rationale was sometimes couched in the ideological jargon of the Cold 
War but was often obscured by rhetoric about cooperation (Altbach, 
1971).
    The programs included many that offered considerable benefit to the 
recipients--including scholarships to study abroad, high-quality 
textbooks, scientific equipment, and other resources. Participation in 
programs took place on an entirely voluntary basis, but in a context of 
scarcity assistance becomes difficult to decline. Acceptance meant 
increased ties to the donor countries and institutions and long-term 
dependence on the countries providing the aid. Installation of 
laboratory equipment or computers, for example, meant continuing 
reliance on the supplier for spare parts, training, and the like.
    We are now in a new era of power and influence. Politics and 
ideology have taken a subordinate role to profits and market-driven 
policies. Now, multinational corporations, media conglomerates, and 
even a few leading universities can be seen as the new neocolonists--
seeking to dominate not for ideological or political reasons but rather 
for commercial gain. Governments are not entirely out of the picture--
they seek to assist companies in their countries and have a residual 
interest in maintaining influence as well. The role of the governments 
of such countries as the United States and Australia in advocating the 
interests of for-profit education providers and others in their 
countries in the World Trade Organization with regard to the General 
Agreement on Trade in Services (GATS) and other matters is but one 
example. As in the Cold War era, countries and universities are not 
compelled to yield to the terms of those providing aid, fostering 
exchanges, or offering Internet products, but the pressures in favor of 
participation tend to prevail. Involvement in the larger world of 
science and scholarship and obtaining perceived benefits not otherwise 
available present considerable inducements. The result is the same--the 
loss of intellectual and cultural autonomy by those who are less 
powerful.
The Role of English
    English is the Latin of the 21st century. In the current period, 
the use of English is central for communicating knowledge worldwide, 
for instruction even in countries where English is not the language of 
higher education, and for cross-border degree arrangements and other 
programs. The dominance of English is a factor in globalization that 
deserves analysis if only because higher education worldwide must 
grapple with the role of English (Crystal, 1997).
    English is the most widely studied foreign language in the world. 
In many countries, English is the required second language in schools, 
and the second language of choice in most places. English is the medium 
of most internationally circulated scientific journals. Universities in 
many countries stress the importance of their professors' publishing in 
internationally circulated scientific journals, almost by definition in 
English, placing a further premium on the language. Internet websites 
devoted to science and scholarship function predominantly in English. 
Indeed, English serves as the language of Internet academic and 
scientific transactions. The largest number of international students 
go to universities in English-speaking countries.
    English is the medium of instruction in many of the most prominent 
academic systems--including those of the United States, the United 
Kingdom, Australia, Canada, and New Zealand--all of which enroll large 
numbers of overseas students. Singapore, Ethiopia, and much of 
Anglophone Africa use English as the primary language of instruction as 
well. English often functions as a medium of instruction in India, 
Pakistan, Bangladesh, and Sri Lanka. Other countries are increasingly 
offering academic programs in English--to attract international 
students unwilling to learn the local language and to improve the 
English-language skills of domestic students and thus enable them to 
work in an international arena. English-medium universities exist in 
many countries--from Azerbaijan and Bulgaria to Kyrgyzstan and 
Malaysia. In many countries--such as Japan, the Netherlands, Germany, 
Mexico, and so on--universities offer English-medium degree programs 
and courses at local universities. Many European Union nations offer 
study in English as a way of attracting students from elsewhere in the 
EU. English is clearly a ubiquitous language in higher education 
worldwide.
    The role of English affects higher education policy and the work of 
individual students and scholars. Obviously, the place of English at 
the pinnacle of scientific communication gives a significant advantage 
to the United States and the United Kingdom and to the other wealthy 
English-speaking countries. Not surprisingly, many scientific journals 
are edited in the United States, which gives an advantage to American 
authors--not only are they writing in their mother tongue but the peer 
review system is dominated by people accustomed to both the language 
and methodology of U.S. scholars. Others must communicate in a foreign 
language and conform to unfamiliar academic norms. As mentioned 
earlier, in many places academics are pressured to publish in 
internationally circulated journals--the sense being that publication 
in the most prestigious scientific journals is a necessary validation 
of academic work. Increasingly, international and regional scientific 
meetings are exclusively in English, again placing a premium on fluency 
in the language.
    English-language products of all kinds dominate the international 
academic marketplace, especially journals and books. For example, 
textbooks written from a U.S. or U.K. perspective are sold worldwide, 
influencing students and academics in many countries and providing 
profits for publishers who function in English. The English-language 
databases in the various disciplines are the most widely used 
internationally. Universities must pay for these resources, which are 
priced to sell to American or European buyers and are thus 
extraordinarily expensive to users in developing or middle-income 
countries. Nevertheless, English-language programs, testing materials, 
and all the other products find a ready market in these countries.
    Countries that use ``small languages'' may be tempted to change the 
medium of instruction at their universities entirely to English. A 
debate took place in the Netherlands on this topic, and it was decided 
to keep Dutch as the main language of instruction largely out of 
concern for the long-term survival of the Dutch language and culture--
although degree programs in English are flourishing in the country. 
Where collaborative degree programs are offered, such as in Malaysia, 
the language of instruction is almost always English and not the 
language of the country offering the joint degree.
    English is supplanting such languages as French, German, and 
Spanish as the international medium of scholarship. These other 
languages are in no danger of disappearing in higher education, but 
their world role has shrunk. The use of English tends to orient those 
using it to the main English-speaking academic systems, and this 
further increases the influence of these countries. Regardless of the 
consequences, however, English will continue as the predominant 
academic language.
The Global Marketplace for Students and Scholars
    Not since the medieval period have such a large proportion of the 
world's students been studying outside their home countries--more than 
1.5 million students at any one time--and some estimate that the number 
of overseas students will grow to eight million by 2020. Large numbers 
of professors and other academics travel abroad temporarily for 
research or teaching, and substantial numbers of academics migrate 
abroad as well to pursue their careers. Aspects of globalization such 
as the use of English encourage these flows and will ensure that growth 
continues. As academic systems become more uniform and academic degrees 
more accepted internationally, immigration rules favor people with high 
skill levels, and universities look to hiring the best talent 
worldwide, the global marketplace will expand.
    The flow of academic talent at all levels is directed largely from 
South to North--from the developing countries to the large metropolitan 
academic systems. Perhaps 80 percent of the world's international 
students come from developing countries, and virtually all of them 
study in the North. Most of these students pursue Master's, doctoral, 
and professional degrees. Many do not return to their countries of 
origin. Close to 80 percent of students from China and India, two of 
the largest sending countries to the United States, do not return home 
immediately after obtaining their degrees, taking jobs or post-doctoral 
appointments in the United States. The years since the collapse of the 
Soviet system has also seen a flow of scientists from Russia to Western 
Europe and North America. Students from industrialized countries who 
study abroad typically do not earn a degree but rather spend a year or 
two in the country to learn a language or gain knowledge that they 
could not acquire at home.
    Most international students pay for their own studies, producing 
significant income for the host countries--and a drain on the economy 
of the developing world. According to estimates, the money spent abroad 
by students from some developing countries more than equals incoming 
foreign aid. These students not only acquire training in their fields 
but also absorb the norms and values of the academic systems in which 
they studied. They return home desiring to transform their universities 
in ways that often prove to be both unrealistic and ineffective. 
Foreign students serve as carriers of an international academic 
culture--a culture that reflects the major metropolitan universities, 
and may not be relevant for the developing world.
    In 2002, universities in the United States hosted almost 85,000 
visiting scholars. Although statistics are not available, it is 
estimated that visiting scholars number 250,000 worldwide. The 
predominant South-North flow notwithstanding, a significant movement of 
academics occurs among the industrialized countries and to some extent 
within other regions, such as Latin America. As part of the Bologna 
initiatives of the European Union, there is more movement within 
Europe. Most visiting scholars return home after their sojourns abroad, 
although a certain number use their assignments as springboards to 
permanent emigration.
    The flow of highly educated talent from the developing countries to 
the West is large--and problematical for Third World development. For 
example, more Ethiopian holders of doctoral degrees work outside of 
Ethiopia than at home, and 30 percent of all highly educated Ghanaians 
and Sierra Leoneans live and work abroad (Outward Bound, 2002, p. 24). 
Many African countries experience this pattern. South Africa is losing 
many of its most talented academics to the North, while at the same 
time it is recruiting from elsewhere in Africa. This migration has 
seriously weakened academic institutions in many developing countries.
    Migration does not affect only developing countries. Academics will 
go abroad to take jobs that offer more attractive opportunities, 
salaries, and working conditions, as illustrated by the ongoing small 
but significant exodus from the United Kingdom to North America. To 
combat this trend, U.K. authorities have provided funds to entice their 
best professors to remain at home. Being at the center of research 
activity and having access to the latest scientific equipment sometimes 
lures scholars from small but well-endowed academic systems, such as 
those in Denmark or Finland to the metropoles. In some fields, such as 
engineering specialties and computer science, the percentage of 
professors from other countries working at U.S. universities is very 
high--reflecting the fact that almost half the doctoral students in 
these fields are foreigners. Academic migration takes place throughout 
the academic system, especially in the sciences, engineering, 
information technology, and some management areas. Such migration 
occurs both at the top of the system, with some world-famous scholars 
attracted abroad by high salaries, and at the bottom, where modest 
salaries are able to draw foreigners to jobs that are unappealing to 
local applicants.
    Academic migration follows complex routes. Many Egyptian, 
Jordanian, and Palestinian academics work at Arabian Gulf universities, 
attracted by better salaries and working conditions than are available 
at home. Indians and Pakistanis are similarly drawn to the Gulf as well 
as to Southeast Asia. Singapore and Hong Kong attract academics 
worldwide. Mexico and Brazil employ scholars from elsewhere in Latin 
America. South Africa, Namibia, and Botswana currently recruit Africans 
from elsewhere on the continent. Some of the best scholars and 
scientists from Russia and a number of Central European countries have 
taken positions in Western Europe and North America. The existing 
traffic among member states will likely grow once the EU implements 
policies to harmonize academic systems, a process now underway.
    The most significant ``pull'' factors include better salaries and 
working conditions and the opportunity to be at the centers of world 
science and scholarship (Altbach, 2003, pp. 1-22). The discrepancies in 
salaries and conditions between North and South mean that in most 
developing countries academics cannot aspire to a middle-class 
lifestyle or have access to the necessary tools of research and 
scholarship.
    One of the many ``push'' factors involves the limited extent of 
academic freedom in many developing countries. Academics can be subject 
to restrictions and even arrested if they stray from officially 
approved topics. Favoritism and corruption in academic appointments, 
promotions, and other areas further erode the environment of the 
university. In many higher education systems, job security or stability 
are unattainable. Conditions at Third World universities stem largely 
from the scarcity of resources and the pressure of increased student 
numbers on overburdened academic institutions. While the ``pull'' 
factors at the centers will retain their influence, the ``push'' 
factors can be moderated. Overall, however, the migration of academic 
talent will continue in the current globalized environment.
    People have long equated the migration of talent with brain drain. 
The life stories of emigrants have changed (Choi, 1995). Many academics 
now keep in close contact with their countries of origin, maintaining 
scientific and academic relationships with colleagues and institutions 
at home. Growing numbers of academics have even gone back after 
establishing careers abroad as economic and political conditions at 
home have changed. Some academics from South Korea and Taiwan, for 
example, left United States to accept senior academic appointments in 
their home countries once academic working conditions, salaries and 
respect for academic freedom had improved. More commonly, expatriate 
academics return home for lecture tours or consulting, collaborate on 
research with colleagues in their country of origin, or accept visiting 
professorships. Facilitated by the Internet, these links are 
increasingly accepted as appropriate and useful. Such trends are 
especially strong in countries with well-developed academic systems, 
such as China, India, and South Africa, among others.
    The migration of academic talent is in many ways promoted by the 
industrialized countries, which have much to gain. Immigration policies 
are in some cases designed to encourage talented personnel to migrate 
and establish residency--although at least in the United States 
security concerns in the aftermath of 9/11 have changed the equation to 
some extent. In many countries, academic institutions make it easy for 
foreigners to fit into the career structure. Countries that place 
barriers to foreign participation in academe, such as Japan and now 
perhaps the U.S. may find it more difficult to compete in the global 
knowledge sweepstakes. Industrialized countries benefit from a large 
pool of well-educated scientists and scholars--people educated by 
developing countries--who choose to take their talents and skills to 
the highest bidders. In this way, the developing world has supported 
the North's already overwhelming lead in science and scholarship. The 
renewal of links between academics who migrate and their countries of 
origin mitigate this situation somewhat, although developing countries, 
and some smaller industrialized nations, still find themselves at a 
disadvantage in the global academic labor market.
The Curriculum
    The field of business administration exemplifies the global 
dominance of ideas by the major English-speaking academic systems. In 
most countries, business administration is a new field, established 
over the past several decades to prepare professionals for work in 
multinational corporations or in firms engaged in international 
commerce as well as in local business. The dominant pattern of 
professional studies is the M.B.A. degree--the American-style Master's 
of business administration. This degree originated as the way to 
prepare American students for work in U.S. business, based on American 
curriculum ideas and American business practices. A key part of many 
M.B.A. programs is the case study, again developed in the U.S. context. 
The M.B.A. model has been widely copied in other countries, in most 
cases by local institutions, but also by American academic institutions 
working with local partners or setting up their own campuses overseas. 
While the programs sometimes are modified in keeping with the local 
context, the basic degree structure and curriculum remain American.
    Another example of the export of the curriculum is the proposed 
incorporation of some general education in the first-degree. Part of 
the U.S. undergraduate curriculum for two centuries, general education 
provides a broad background in the disciplines along with critical 
thinking skills. Higher Education in Developing Countries: Peril and 
Promise, an influential report sponsored by the World Bank and UNESCO, 
advocates general education as an alternative to the existing largely 
specialized undergraduate curriculum common in higher education 
worldwide (Task Force on Higher Education, 2000). The future of general 
education as a curriculum reform is not clear.
    There is an increasing use of common textbooks, course materials, 
and syllabi worldwide, stimulated by the influence of multinational 
publishers, the Internet, and databases, as well as the growing number 
of professors who return home after their study abroad with ideas 
concerning curriculum and instructional materials. These materials 
originate mainly in the large academic systems of the North--especially 
the United States, the United Kingdom, and France.
    Disciplines and fields vary in terms of how globally homogenous 
they have become. Such fields as business administration, information 
technology, and biotechnology are almost entirely dominated by the 
major academic centers. Other fields--such as history, language 
studies, and many areas in the humanities--are largely nationally 
based, although foreign influences are felt in methodology and 
approaches to research and interpretation. The internationalization of 
the curriculum, like other aspects of globalization, proceeds largely 
from North to South.
The Multinationalization of Higher Education
    The emergence of a global education marketplace exhibits itself in 
the form of a variety of multinational higher education initiatives--
ranging from ``twinning'' programs linking academic institutions or 
programs in one country with counterparts in another to universities in 
one country setting up branch campuses in another. Cross-border higher 
education ventures include many that use the Internet and other 
distance education means to deliver their programs. Many for-profit 
companies and institutions have invested in multinational educational 
initiatives, as have a range of traditional higher education 
institutions (Observatory on Borderless Higher Education, 2004).
    History shows that the export of educational institutions and the 
linking of institutions from different countries generally represented 
a union of unequals. Earlier ``export models'' involved colonialism--
the colonial power simply imposed its institutional model and 
curriculum, often diluted and designed to for intellectual 
subservience, on the colonized (Ashby, 1966). In almost all cases, the 
institution from the outside dominated the local institution, or the 
new institution was based on foreign ideas and nonindigenous values. 
Examples include the British in Africa and Asia, the Dutch in what is 
now Indonesia, and French initiatives in Africa and Asia. The Spanish 
monarchy asked the Roman Catholic Church to set up universities in 
Latin America and the Philippines; religious orders such as the Jesuits 
undertook what might now be referred to as multinational higher 
education. In the 19th century, American Protestant missionaries 
established universities based on the U.S. model in Lebanon, Egypt, 
Korea and Turkey, among other places--for example, the American 
University of Beirut. During the Cold War, both the United States and 
the Soviet Union exported their academic institutions and ideas, mainly 
to the developing world, generally tied to foreign aid, and in some 
cases set up universities reflecting their views--such as the 
University of Nigeria-Nsukka (Hanson, 1968).
    The same inequality is characteristic of the 21st century, although 
neither colonialism nor Cold War politics impels policy. Now, market 
forces, demands for access, and monetary gain motivate multinational 
higher education initiatives. When institutions or programs are 
exported from one country to another, academic models, curricula, and 
programs from the more powerful academic system prevail. Thus, programs 
between Australian and Malaysian institutions aimed at setting up new 
academic institutions in Malaysia are always designed by Australian 
institutions. Rarely, if ever, do academic innovations emanate from the 
periphery out to the center.
    The export of academic institutions from one country to another is 
a growing but not entirely new phenomenon. Of course, both traditional 
colonialism and the government-sponsored foreign assistance programs of 
the Cold War era exported institutional models, practices, and 
curriculum from the metropole to developing countries. In the past 
decade, the number of institutional exports based on non-governmental 
programs have risen, usually on the initiative of the exporting 
country. In the 1980s, for example, American colleges and universities 
directed their attention to Japan as a higher education market. Several 
hundred U.S. institutions explored the Japanese market, and more than a 
dozen established campuses--usually in cooperation with a Japanese 
institution or company (Chambers & Cummings, 1990). A small number of 
Japanese institutions looked into the feasibility of a U.S. connection, 
with a few even setting up branch campuses. However, most Japanese 
programs involved bringing Japanese students to the United States for 
study, while U.S. programs focused on educating Japanese students in 
Japan. Generally, the institutions engaging in export activities were 
not the most prestigious schools. By 2000, very few of the branches 
were still operating. In Japan, the difficulty of obtaining Ministry of 
Education certification for U.S. programs proved overwhelming, and the 
initiatives on both sides were affected by the protracted economic 
slowdown in Japan. The U.S.-Japan initiatives were unusual in that both 
sides were industrialized countries.
    Some of the export initiatives taking place today are indicative of 
global trends. A small number of prestigious American universities are 
establishing campuses worldwide, usually in popular professional fields 
such as business administration. The University of Chicago's business 
school now has a campus in Spain that offers Chicago degrees to Spanish 
students and students from other European countries, using the standard 
Chicago curriculum--taught in English mostly by Chicago faculty 
members--with an international focus. It includes a period of study at 
the home campus as well. Some other U.S. universities have developed 
similar programs.
    An unusual but interesting model of multinationalization is being 
undertaken by Singapore, which is inviting a number of prestigious 
foreign universities, such as the University of Pennsylvania's Wharton 
School, to start programs in Singapore. The government carefully 
selects the institutions and provides incentives to encourage them to 
come to Singapore. Another trend has been the establishment of U.S.-
style universities in such countries as Kyrgyzstan, Qatar, and 
Bulgaria, among other places. These schools typically originate through 
local initiative, and many have strong links to American universities. 
Some are supervised by the U.S. partners and accredited in the United 
States. The language of instruction is English and the curriculum U.S. 
based. The quality of these American clones varies considerably, with 
some simply capitalizing on the cachet of an American-style education.
    In keeping with the standard export model, a university in an 
industrialized country will set up a program abroad, often but not 
always in a developing country, at the invitation of a host 
institution. The host may be an educational institution or a 
corporation without any link to education, or some combination of the 
two. Many examples of these arrangements have been set up in Malaysia 
to satisfy unmet demand by local students. Universities from Australia 
and the United Kingdom are most active in Malaysia, but the new 
programs have generated complaints of low quality, poor supervision, or 
inadequate communication between the providers and the hosts. In 
Israel, a number of small American colleges and universities (some of 
lesser quality) began to offer academic degrees when the market was 
opened up in the 1990s by the Israeli government. After considerable 
criticism, restrictions were later placed on the programs--many of 
which have ceased to exist.
    In another export model, foreign academic degree programs are 
``franchised'' by local institutions. The foreign university lends its 
name provides the curriculum, some (often quite limited) supervision, 
and quality control to a local academic institution or perhaps business 
firm. The new institution is granted the right to award a degree or 
certificate of the foreign institution to local students. 
Unfortunately, these franchising arrangements have led to many abuses 
and much criticism. Many articles have appeared in the British press 
charging that some U.K. institutions, mostly the less prestigious ones, 
involved in overseas programs are damaging the ``good name'' of British 
higher education. Meanwhile, ``buyers'' (fee-paying students) overseas 
think that they are getting a standard British degree, when in reality 
they are receiving the degree but not the level of education provided 
in the United Kingdom.
    There are a large number of ``twinning'' programs worldwide. This 
arrangement links an academic institution in one country with a partner 
school in another. Typically, the university in the North provides the 
basic curriculum and orientation for an institution in the South. In 
such arrangements, academic degrees are often jointly awarded. Twinning 
has the advantage of aiding institutions in the South in developing new 
curricular offerings, with the stamp of approval of an established 
foreign university. Again, the higher education 'products' come from 
the North, often with little adaptation to local needs.
    As can be seen in this brief discussion, there are many facets to 
the 21st century multinationalization of higher education. However, 
some common perspectives and motivations can be identified. With few 
exceptions, a central goal for all of the stakeholders, especially 
those in the North, is to earn a profit. Institutions in the South that 
are attracted to multinational initiatives may also be interested in 
making money, but they also want to meet the growing demand for higher 
education and for new degree programs that may not be available in 
local schools. As with other aspects of globalization in higher 
education, multinational arrangements between institutions are marked 
by inequality.
Information Technology
    The information age carries the potential of introducing 
significant change in higher education, although it is unlikely that 
the basic functions of traditional academic institutions will be 
transformed. The elements of the revolution in information technology 
(IT) that are to transforming higher education include the 
communication, storage, and retrieval of knowledge (Castells, 2000). 
Libraries, once the repositories of books and journals, are now equally 
involved in providing access to databases, websites, and a range of IT-
based products (Hawkins & Battin, 1998). Scholars increasingly use the 
Internet to undertake research and analysis and to disseminate their 
own work. Academic institutions are beginning to use IT to deliver 
degree programs and other curricula to students outside the campus. 
Distance education is rapidly growing both within countries and 
internationally. IT is beginning to shape teaching and learning and is 
affecting the management of academic institutions.
    IT and globalization go hand in hand. Indeed, the Internet serves 
as the primary vehicle for the globalization of knowledge and 
communications. As with the other aspects of globalization, significant 
inequalities exist. Inevitably, the information and knowledge base 
available through the Internet reflects the realities of the knowledge 
system worldwide. The databases and retrieval mechanisms probably make 
it easier to access well-archived and electronically sophisticated 
scientific systems of the advanced industrialized countries than the 
less networked academic communities of the developing countries.
    For scholars and scientists at universities and other institutions 
that lack good libraries, the Internet simplifies the obtaining of 
information. This change has had a democratizing effect on scientific 
communication and access to information. At the same time, however, 
many people in developing countries have only limited access to the 
Internet (Teferra, 2003). Africa, for example, has only recently 
achieved full connectivity to the Internet.
    The Internet and the databases on it are dominated by the major 
universities in the North. The dominance of English on the Internet 
also affect access and usage of information. Multinational publishers 
and other corporations have become key players, owning many of the 
databases, journals, and other sources of information. Academic 
institutions and countries unable to pay for access to these 
information sources find it difficult to participate fully in the 
networks. Tightening copyright and other ownership restrictions through 
international treaties and regulations will further consolidate 
ownership and limit access (Correa, 2000).
    Distance education, while not a new phenomenon, comprises another 
element of higher education profoundly affected by IT. The University 
of South Africa, for example, has been offering academic degrees 
through correspondence for many decades. The Open University in the 
United Kingdom has effectively used a combination of distance methods 
to deliver its highly regarded programs. IT has greatly expanded the 
reach and methodological sophistication of distance education, 
contributing to the growth of distance education institutions. Of the 
10 largest distance education institutions in the world, seven are 
located in developing countries, and all use IT for at least part of 
their programs. Universities and other providers in the industrialized 
nations are beginning to employ IT to offer academic programs around 
the world, a significant portion of which are aimed at developing 
countries. Entire degree programs in fields such as business 
administration are offered through distance education on the Internet, 
and many providers view the international market as critical for the 
success of their programs. These providers include corporations, such 
as some of the major multinational publishers, for-profit educational 
providers like Sylvan Learning Systems, and others. Some universities 
now offer degree and certificate programs through the Internet to 
international audiences. Firms such as Microsoft, Motorola, and others 
are offering competency certificates and other training programs in 
fields relating to their areas of expertise.
    As with the other aspects of globalization discussed in this 
analysis-the leading providers of IT consist of multinational 
corporations, academic institutions, and other organizations in the 
industrialized nations. The Internet combines a public service--e-mail 
and the range of websites to which access is free--with a commercial 
enterprise. Many databases, electronic journals, e-books, and related 
knowledge products are owned by profit-making companies that market 
them, often at prices that preclude access by those in developing 
countries.
    Nevertheless, developing countries have been able to take advantage 
of IT. For example, most of the largest universities using distance 
education are located in developing countries. The African Virtual 
University is an effort by a number of African nations to harness the 
Internet and other distance techniques to meet their needs. AVU's 
success so far has been limited, and many of the courses and programs 
are based on curriculum from the North. E-mail is widely used to 
improve communication among scientists and scholars and to create 
networks in the developing world. While the information revolution will 
neither transform higher education, nor is it a panacea for the higher 
education needs of developing countries, it is one of the central 
elements of globalization in higher education.
International Agreements and Frameworks
    In the new era of globalization in higher education, new 
international agreements and arrangements have been drawn up to manage 
global interactions. The arrangements between countries range from 
bilateral agreements on student and faculty exchanges to the mutual 
recognition of degrees--for example, the many binational commissions 
governing the American Fulbright scholarship and change programs. Of 
the current international agreements in higher education, perhaps the 
most comprehensive are the European Union's: the comprehensive Bologna 
framework, designed to introduce changes to harmonize the higher 
education systems of all EU member states, and specific exchange and 
scholarship programs such as ERASMUS and SOCRATES. In contrast, NAFTA, 
the North American Free Trade Agreement, ASEAN (the Association of 
Southeast Asian Nations), and others have few implications for higher 
education.
    An indication of the potential impact of globalization is the 
debate over the inclusion of higher education in particular and 
knowledge industries within the framework of the WTO through the GATS 
proposal. While GATS has not yet been fully formulated and is not part 
of the WTO framework, it is relevant not only because of its influence 
but also for what it reveals about the reality of globalization. GATS 
seeks to establish ``open markets'' for knowledge products of all 
kinds--including higher education. The idea behind GATS and, for that 
matter, the concept of globalization is that knowledge is a commodity 
like any other and should be freely traded around the world. The 
proponents argue that free trade will benefit everyone by permitting 
competition in the marketplace of ideas and knowledge products.
    GATS and related arrangements also seek to provide a legally 
binding framework for the circulation of educational services and for 
the protection of intellectual property (Knight, 2004, pp. 3-38). Thus, 
GATS and the WTO are very much related to TRIPS (Trade Related 
Intellectual Property) arrangements and copyright regulations. The 
motivating force behind all of these regulatory frameworks is to 
rationalize the global trade in knowledge and to ensure open markets 
and protections for the owners of knowledge products. The WTO and its 
related agreements, as well as international copyright, have the force 
of law--they are international treaties supported by a legal 
enforcement regime. These arrangements were created to protect the 
sellers and the providers, not the buyers and users, and as a result 
they have negative implications for developing countries (Raikhy, 
2002). For example, copyright laws have been further strengthened to 
protect the owners of knowledge, while failing to open access through 
``fair use'' provisions or meaningful special arrangements for 
developing countries.
    Those favoring GATS and the regulatory framework in general are the 
sellers and owners--multinational knowledge companies, governments 
focusing on exports, and others (OECD, 2002). Testing companies such as 
the U.S.-based Educational Testing Service, multinational publishers, 
information technology and computer firms, for-profit educational 
providers such as Sylvan Learning Systems, and others are examples of 
businesses involved in global education that see GATS as benefiting 
their interests. In many countries, government agencies most focused on 
GATS include not the ministries of education but rather departments 
concerned with trade and export promotion. In the United States, it is 
the Department of Commerce that has taken the lead and not the 
Department of Education. In the United Kingdom, the Department of Trade 
and Industry has been in the forefront. Education groups in the United 
States, Canada, and a number of other countries have been skeptical or 
opposed to the GATS proposal. The American Council on Education, which 
represents most university presidents in the United States, for 
example, has spoken out against GATS. Developing countries have 
generally not yet taken a position on the concept of free trade in 
education and knowledge products.
    While the complicated details of a GATS treaty have not been worked 
out, the basic issues are straightforward. Should education in all of 
its manifestations be considered as a commodity to be traded in the 
marketplace, regulated in the same fashion as are automobiles or 
bananas? As Lawrence Summers, the former U.S. Treasury Secretary and 
current President of Harvard University put it in a recent interview, 
``I'm skeptical as to whether bringing educational issues under the 
auspices of trade negotiations would be helpful. . .. To start with, 
many educational institutions are nonprofit, their motivations are 
different from the motivations of commercial firms that we think of in 
a trade context. There may be some egregious practices that should be 
addressed, but I would be skeptical about treating education in a way 
that had any parallels with financial services, with insurance, or with 
foreign investments'' (The World According to Larry, 2002, p. 38).
    While GATS would bring developing countries into a global framework 
of commerce and exchange in higher education, it would remove aspects 
of autonomy from educational decision-making. Extending the principle 
of free trade to education would open national markets in signatory 
countries to testing companies, providers of distance education, and 
many other organizations. Regulation or control of these entities would 
prove difficult if not impossible to achieve. Institutions or companies 
could, in principle, count on having access to foreign education 
markets. Since developing countries typically import rather than export 
their educational products or institutions, it is unlikely that GATS 
would promote their exports. Developing countries represent the markets 
that sellers from the industrialized world are eager to target. Most 
developing countries, having few educational ``products'' to export, 
would be at the mercy of the multinational providers.
    Current arrangements--in which all countries retain authority over 
educational imports and exports, subject to some regulatory arrangement 
such as international copyright, patent treaties, local accreditation 
and licensing arrangements, and the like--nonetheless permit a great 
deal of international higher education exchange, as this essay 
illustrates. It can be argued that international education markets are 
already appropriately open, and additional legal requirements to open 
them further are not needed. Cross-border educational transactions of 
all kinds are being actively pursued worldwide. At present, the 
developing countries are the main importers of products and services 
from abroad--and they would be most directly affected by GATS.
Conclusion
    Globalization in higher education and science is inevitable. 
Historically, academe has always been international in scope and has 
always been characterized by inequalities. Modern technology, the 
Internet, the increasing ease of communication, and the flow of 
students and highly educated personnel across borders enhances 
globalization. No academic system can exist by itself in the world of 
the 21st century.
    The challenge is recognize the complexities and nuances of the 
global higher education context--an academic world fraught with 
inequalities in which market and commercial forces increasingly 
dominate. The traditional domination of the North over the South 
remains largely intact. The task of ameliorating inequalities in the 
context of mass higher education is not an easy one. Yet, it is 
important to ensure that globalization does not turn into the 
neocolonialism of the 21st century.

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Appendix 1

        Twinning and Branch Campuses: The Professorial Obstacle

                           Philip G. Altbach
    Branch campuses, twinning arrangements, and other manifestations of 
cross-border higher education are booming. Universities in Europe, 
Australasia, and North America see a huge market by offering their 
degrees in other countries. At the same time, Singapore and several of 
the states in the Arabian Gulf have identified themselves as 
educational centers and are attracting international higher education 
providers. In the Gulf, there is even competition for attracting 
overseas universities. China has opened its doors to foreign 
institutions, and India is moving in this direction.
    While there are no accurate numbers, more than 500 branch campuses 
exist worldwide--plus thousands of ``twinned'' programs. In addition, 
the phenomenon of the ``American University of . . .'' manifests 
another trend in cross-border higher education. There are a dozen or 
more such universities, some of which have a direct link with a U.S. 
university while many simply use the name ``American'' and offer a 
U.S.-style curriculum in English in a non-U.S. setting. If the General 
Agreement on Trade in Services (GATS) becomes part of the structure of 
international academic arrangements, the numbers of all kinds of cross-
border institutions will increase even faster.
    One significant problem exists with these arrangements. Who is 
teaching the students at these branch campuses? What does a degree from 
a university signify if the teaching staff are not from the university 
offering the degree? To use the McDonald's analogy--is the meal 
(degree) a true McDonald's hamburger if only the recipe (the 
curriculum) comes from McDonalds. The rest of the process--the 
ingredients (facilities) and the cooks (professors)--are local, rather 
than from the sponsoring institution. Should a university in the United 
Kingdom (or another country) claim to offer a degree overseas if only 
the curriculum is from the sponsoring school, perhaps along with an 
element of quality control?
    With little data indicating the proportion of faculty members from 
the home universities teaching at branch or twinning campuses, 
anecdotal evidence shows that the numbers are small and most of the 
teaching is carried out by professors who are not faculty from the 
sponsoring institution. Even when they do come from the home 
university, faculty teaching at branch or twinned campuses are 
generally not the ``star'' research-active professors.
    It is not known if some of the recent high-prestige universities 
that have entered the branch campus business--the University of 
Chicago, the Cornell University Medical School, the University of 
Nottingham, and others--have a different profile than the many more 
average institutions thus far engaged.
The Background of Teachers
    Many faculty members are hired locally--some ``moonlighting'' from 
a local university. Other ``local hires'' are full-time staff, obtained 
from the local academic market or attracted away from local or regional 
institutions. Some faculty are natives of the country of the sponsoring 
university but not faculty members at that institution. For example, an 
American university in Singapore might hire an American working in 
Japan or Taiwan. Ph.D. holders who are teaching part time or on short-
term assignments in the home country may also be attracted to work 
overseas. The sponsoring university generally tries to ensure that 
these faculty have a doctoral degree from a respectable institution--
insofar as possible from the country where the sponsoring university is 
located.
Attracting Top-Quality Faculty
    At branch campuses this task may not be easy, particularly on an 
assignment of a year or more. Except for a few specialists in the 
culture where the branch is located or professors committed to learning 
about foreign cultures, an overseas assignment as a full-time member of 
the academic staff at a university in Europe, North America, or 
Australia may not lure prominent faculty. In addition to the challenges 
of uprooting families, finding schools for children, and the like, an 
overseas assignment disrupts the rhythm of academic life. For younger 
professors seeking to obtain tenure and promotion, an overseas 
assignment is particularly dangerous. It will inevitably disrupt a 
research agenda and in the sciences may make research impossible given 
the lack of equivalent laboratory equipment and staff. Since branch 
campuses are always oriented toward teaching rather than research, 
teaching loads are often higher than at the home university. Libraries 
and other facilities are never the same either.
    Many branch campuses offer faculty members from the home university 
additional perquisites--such as housing, transportation for families, 
payment of school fees, and others. In some cases, salary supplements 
are provided, and there is usually a tax advantage. But even these 
benefits may not produce a sufficient attraction.
    As a result of these factors, the professors teaching at branch 
campuses are seldom full-time research-active faculty from the home 
university. If from the home institution, they are often senior staff 
close to retirement or those with fewer commitments at home. Most are 
not from the home university. Relevant academic departments at home 
often must approve the academic qualifications of these professors and 
offer them some kind of temporary appointment to legitimize their 
appointments.
Conclusion
    Does an academic degree mean that a student has studied at the 
university offering the degree? Does it mean that he or she has been 
taught by the faculty of that institution? Does it mean that the 
curriculum and language of instruction of the home university have been 
used? Is it enough that the home institution has approved the 
qualifications of the teaching staff and that the general conditions of 
teaching are considered to be satisfactory? Should teaching be provided 
by faculty members who are actually on the home institution's staff, or 
is it acceptable that an itinerant but qualified collection of teachers 
do the work? Is it acceptable that the prestigious universities whose 
fame in their home countries is based on excellence in research as well 
as teaching provide an academic environment in the branch campus almost 
exclusively devoid of research? Cross-border academic cooperation and 
transnational higher education are characteristics of the 21st century, 
but it is necessary to carefully examine the realities in order to 
assess quality and effectiveness.

    Philip G. Altbach is Monan Professor of Higher Education and 
Director of the Center for International Higher Education at Boston 
College.

Appendix 2

                               July 2007

                   International Branch Campus Issues

                 Laura E. Rumbley and Philip G. Altbach
    This memorandum is intended to provide an introduction to some of 
the key issues relating to the phenomenon of branch campuses worldwide. 
We mainly summarize some of the key points made in L. Verbik and C. 
Merkley, (2006). The International Branch Campus: Models and Trends, 
published by the Observatory on Borderless Higher Education, London. 
Additional insights are added as well. This memo and the OBHE report 
provide an overview of branch campuses, with data from a variety of 
countries. A new report specifically on U.S. branch campuses abroad, 
Madeleine Green, et al., (2007). Venturing Abroad: Delivering U.S. 
Degrees Through Overseas Branch Campuses and Programs, published by the 
American Council on Education, provides some detail on the U.S. 
experience. The authors note that there is no comprehensive analysis of 
this theme anywhere and no reliable statistics concerning the extent of 
the phenomenon. The demise, just a month ago, of the Australian 
University of New South Wales' campus in Singapore after considerable 
investment and effort by UNSW, and problems with other Australian 
initiatives, is an indication of the volatility of this sector.

Overview

          Significant growth over past decade

          U.S. leads internationally with in terms of overseas 
        branch campus activity but ``more and more countries are 
        engaging in branch campus development'' (p. 2)

          Diverse geographic spread of initiatives, but 
        ``financial incentives'' do seem to spur activity in particular 
        countries/regions

          three main approaches to establishing/funding branch 
        campus are identified:

                1.  self-funding

                2.  external funding-more common among newer 
                initiatives

                3.  provision of facilities-more common among newer 
                initiatives

    U.S. has had branch campuses overseas since at least the 1950s

          Originally designed for institutions' own study 
        abroad students or locally based U.S. military personnel

          Since 1990s--much bigger operations (in terms of both 
        academic activities and physical plant) catering to local and/
        or international students

    Why?

          Concerns over quality and ed provision abroad in 
        situations where the home institution didn't have total control

          Incentives--external support and/or regulatory 
        environments favoring branch campus developments

          Interest in diversifying and becoming less dependent 
        on international student recruitment to the home campus

    Other issues driving/informing OBHE study

          No official, comprehensive list of international 
        branch campuses appears to exist anywhere.

          Lack of global consensus on a definition of branch 
        campuses.

          ``little to suggest that branch campus development 
        has peaked'' (p. 24), although it may have reached a 
        ``saturation point'' in some places, such as Singapore and Hong 
        Kong.

          Growth driven by opportunities for external funding, 
        increased competition in int'l ed and greater regulation of 
        transnational ed around the world.

          However, nothing indicates that ``fully-fledged 
        branch campuses will become the dominant type of transnational 
        education in the near future'' (p. 24), given their resource 
        intensiveness and the ``significant financial and reputation 
        risks'' (p. 24) that accompany them.

Definitions

    Some subjectivity involved in determining what exactly a branch 
campus is. The OBHE puts forth the following as a definition of a 
branch campus:

    ``. . .an offshore operation of a higher ed institution which 
fulfils the following criteria:

          The unit should be operated by the institution or 
        through a joint-venture in which the institution is a partner 
        (some countries require foreign providers to partner with a 
        local organization) in the name of the foreign institution.

          Upon successful completion of the study programme, 
        students are awarded a degree from the foreign institution.''

    OBHE's report excludes

          joint degree programs

          institutions where one or more foreign or domestic 
        institution's programs are offered

          programs offered through a partner institution

          branch campuses that have evolved into fairly 
        independent institutions in their own right

          ``foreign-backed'' universities (p. 4)

          ``international universities'' modeled on a foreign 
        country's higher ed system but without formal ties to a 
        specific institution (American University of Beirut, of Cairo, 
        etc.)

Opportunities

    Rationales

          To diversify modes of delivery to international 
        students and be less dependent on recruitment to the home 
        campus

          To collaborate more easily with foreign academic 
        institutions and industries

          To generate revenue

          For strategic internationalization

          To reach new markets and students

          To contribute to HE capacity building in countries 
        with less developed HE sectors

          To enhance overall international profile and 
        reputation

          To reclaim/reframe historical linkages to 
        contemporary advantage

    Benefits

          Control over ed provision and quality

          Simplicity--no need to enter into potentially 
        complicated partnerships

          Establishment of ``a full and distinctive corporate 
        presence in another country''

          Brand name enhancement

          Competitive advantage over competitors' offerings

Risks

    Info about risks appears to be more widely available, and more 
regularly accessed, now than in previous years.
    Branch campus development must be understood as an entrepreneurial 
activity that (a) implies a certain amount of risk that must be 
understood and accepted going in, and (b) may not yield positive 
results (espec. financially) for some time, although ``brand 
recognition'' and reputation enhancement may come more quickly.
    Risk areas include:

          Financial loss--these risks tend to be greatest

          Operational challenges

          Market fluctuations

          Damage to institutional reputation--these are also 
        fairly considerable risks

    Regulations:

          Complex and fast-changing landscape for national 
        regulation of transnational provision

          Relatively few countries have specific regs in place 
        for foreign providers, but this number is growing--South 
        Africa's effort to tighten its regulatory framework has had a 
        major impact on foreign providers there by demanding a much 
        higher level of commitment to quality, planning, oversight, and 
        transparency of operations (OBHE Breaking News Article--6th 
        August 2002)

          Also growing are the numbers of countries seeking to 
        regulate the export activities of their HE institutions (major 
        examples being the UK and Australia)--trying to ensure that 
        provision abroad is comparable in quality to provision at home

Major Players

    Branch campus providers:

          OBHE's report identifies 82 international branch 
        campuses.

          North to South trend dominates

          U.S. clearly dominates (50 percent), followed by 
        Australia (12 percent--has been more active than the UK for a 
        full decade), the UK (five percent--more recently pursuing 
        branch campuses than Australia), and Ireland (five percent)

          South to South activity is rare (India and Pakistan 
        the rare exporters to places like Dubai's Knowledge Village)

    Why U.S. dominance?

          History--have been setting up overseas operations for 
        several decades

          Invitations--have been actively courted by proactive 
        hosts (Singapore, Qatar, etc.)

          Post-9/11 environment-perception is it may be easier 
        to take the ed overseas than get the students into the U.S.

    Branch campus hosts:

          UAE (20 percent)--almost all in its Knowledge Village

          Qatar (nine percent)

          Singapore (seven percent)

          Canada (six percent)

          Malaysia (six percent)--[good overview on situation 
        in Malaysia in OBHE Breaking News Article--11th November 2004]

          China (five percent)

          Support, funding, and infrastructure make all the 
        difference in terms of attracting branch campuses

    Providers and hosts:

          UK

          Australia--[A lot going on here. On the one hand, 
        Australia has had some highly public setbacks in terms of 
        overseas failures in the last year and is seen to be reigning 
        in this activity to some degree, shutting down some operations 
        abroad (see OBHE Breaking News Articles--1st June and 10th July 
        2007) and applying tighter quality assurance controls (see 
        Aussie govt's Transnational Quality Strategy). Meanwhile, the 
        development of South Australia's `University City' initiative 
        raises Australia's profile as a branch campus host in its own 
        right.]

          Canada

          Netherlands

          France

    * ``The only country which seems to be almost untouched by branch 
campus developments is the U.S., which in general exhibits very limited 
transnational activity.'' Interest by Latin American universities in 
the growing U.S. Hispanic community may change this reality over time. 
There is evidence that this situation has changed since the OBHE.

Branch campus interests, activities, and characteristics

    Degrees and subjects

          23 percent offer only Bachelor's degrees

          58 percent up to Master's degrees

          five percent up to Ph.D. level

          five percent offer pre-Bachelor's only programming

          66 percent teach more than one subject area

          74 percent offer some courses in either business, IT, 
        or both

    Facilities, enrollment, and tuition

          Fairly incomplete for the 82 institutions included in 
        the study (see p. 9)

    Funding

          Model A--Fully funded by institution

                  May be a fading model, as more institutions seek 
                collaborative arrangements, although the benefit of 
                this model is autonomy of decision-making and quality 
                control

          Model B--External funding

                  Funding may come from host government funds/support 
                or private companies or other orgs, in the home or host 
                countries, or elsewhere

                  This model has come on the scene mostly during the 
                last decade

                  Often linked to a national strategy for 
                internationalization by the host country

                  Obvious benefits, however institutions need to 
                carefully consider issues of mission and whether they 
                can cover costs not provided for by the host.

          Model C--Facilities provided

                  Newest model but quickly growing

                  Key examples are Knowledge Village (KV) (est. 2002, 
                Dubai) and Education City (EC) (est. late 1990s, Qatar)

                  Most often found in economically advanced states of 
                the Gulf due to availability of resources (public and 
                private $), lack of local HE capacity (i.e., need and 
                interest in developing this), and a concentrated 
                strategy for reform of local economy (e.g., moving away 
                from reliance on oil revenues)

                  South Korea and to some extent Japan seem to be 
                moving toward ``special zones'' for foreign investment 
                to facilitate developments along these lines but don't 
                have the investment resources of KV and EC.

    Underhill, W. (2006, August 21). Sowing seeds: From Cornell in 
Qatar to Monash in Malaysia, satellite campuses are a booming business. 
Newsweek, International Edition.
    ``When it comes to education, location isn't everything; provenance 
is.'' (Underhill, W.)
    ``A branch campus is about commitment--not just renting out your 
name'' (Stephan Vincent-Lancrin, OECD)

    Number and diversity of players in international branch campus game 
are expanding:

          For the U.S., this means more competition in this 
        area

          lesser-known (particularly non-U.S.) universities 
        expanding abroad have less to lose and more to gain, whereas 
        big-name U.S. universities have a lot on the line in terms of 
        their already-established international reputations/``brand 
        names''

    Benefits of the branch campus movement are multi-faceted:

          Students get good educational options without the 
        costs of travel

          Host countries get ``top-rated schools to plug the 
        gaps in their own educational systems''

          Local economies gain access to research facilities 
        for economic development and income from students attracted 
        from throughout the region

          Incoming institutions are able to internationalize 
        their profiles and reputations, and can provide good overseas 
        gigs for their faculty and students while exercising 
        potentially better quality control than through distance 
        education on franchising

          The U.S. can reap important public diplomacy 
        benefits--``This is a good way for the United States to 
        represent itself overseas, particularly in Arab countries where 
        in the past most of the trae has been in guns and oil'' 
        (Antonio Gotto, dean of Weill Cornell Medical College in 
        Qatar's Education City)

    Challenges:

          Meeting host governments' expectations, including 
        ``performance targets'' tied to ongoing financial support

          Potential exists for flat-out ``bad fits'' (LER's 
        term), in the form of culture clashes and low enrollments, etc. 
        (a la U.S. expansion into Japan in 1980s)

    Imperatives:

          Government support for higher education in many 
        countries (U.S., UK, Australia) is falling, making it important 
        for institutions to generate new sources of income

          International student recruitment to home campuses is 
        becoming increasingly more competitive globally

          More home-grown options for HE are cropping up around 
        the world (good example being China), so it makes sense to 
        start competing on that turf

          More English-language programs are available in more 
        places around the world--U.S. can't expect students to continue 
        coming here for that reason, and have new opportunities to 
        compete in English-speaking environments in many more countries

Key Issues and Questions

    Branch campuses seem to make good sense and have good potential for 
long-term success under the following conditions:

          Generalized economic growth and dynamism in the host 
        country

          Unmet demand for higher education in the host country

          Widespread use of English in the host country

          Meaningful host country incentives to foreign 
        providers, in the form of funding, facilities, favorable tax 
        and/or regulatory arrangements, etc.

          Host country interest in curbing the outflow of 
        domestic students and professionals through study abroad and 
        brain drain

          Reasonable levels of competition among foreign 
        providers in the host country or region

          Sound strategic planning to balance higher education 
        imports and domestic capacity in ways that benefit both sides

          Stable, transparent, and appropriate regulatory 
        environments for foreign providers (for accreditation, quality 
        assurance, etc.)

          Host country-foreign provider relationships that are 
        built on the concepts of partnership and commitment

    Branch campus experiments can end disastrously:

          Closure of University of La Verne Athens in Fall 2004 
        (OBHE Breaking News Article--1st November 2004) provides 
        example of a situation with multiple layers of problems

                  Questionable internal controls

                  Poor management of relationship with Greek partner

                  Insufficient oversight of foreign/private 
                educational provision by Greek authorities

                  Very negative financial, political, legal, and 
                public relations consequences

          UNSW Asia was launched in Singapore by Australia's 
        University of New South Wales in an effort to establish Asia's 
        first foreign comprehensive university. It closed its doors on 
        28 June 2007 after just a few months of operation, citing an 
        unviable financial outlook, mostly due to poor enrollment 
        levels--current and projected. Major issues: tuition (was very 
        high, prompting the question ``why not just go to nearby 
        Australia itself at that cost?''); programming (does Singapore 
        just lend itself more naturally to specialized foreign 
        programming rather than a comprehensive university?); poor 
        financial planning (`` `You can' set up such a big venture 
        without an established stream of income,'' claims Professor 
        Simon Marginson. . . ``because you can't subsidise the majority 
        of your costs for very long.'')

    Host countries may have various rationales for seeking to import 
branch campuses:

          Qatar appears to have both foreign policy objectives 
        and domestic educational and economic development goals: 
        ``Qatar, which is an ally of the American government and 
        currently hosts the Pentagon's Middle Eastern headquarters for 
        the war in Iraq, is aiming to improve the quality of education 
        for its citizens, while increasing its ties with the United 
        States'' (OBHE Breaking News Article--2nd April 2003)

          Presence of competitive foreign branch campuses can 
        be used to address unmet demand for higher ed in-country, and 
        be a tool for improving domestic higher ed provision over time, 
        as in Malyasia (OBHE Breaking News Article--11th November 2004)

          The planned ``University City'' in the state of South 
        Australia seems to be the first example of a Western country 
        actively courting international branch campuses. The goal seems 
        to be to continue to attract large numbers of Asian-Pacific 
        students to Australia; raise the level of research and overall 
        competitive performance of Australian higher education, by 
        placing high-quality foreign providers in the mix; and derive 
        real economic benefits for the local economy hosting the 
        institutions

    Important tensions are revealed in the international branch campus 
movement in some contexts

          Taiwan, for example, appears to have authorized 
        foreign provision of higher education `` `in order to comply' 
        with WTO negotiations, but did not necessarily reflect a desire 
        to open up the market to foreign institutions'' (OBHE Breaking 
        News Article--10th May 2005), since it already has excess 
        capacity. Along with Japan and Korea, Taiwan struggles ``with 
        wanting to both protect and challenge domestic higher 
        education, and both internationalise and retain a strong 
        national identity'' (OBHE Breaking News Article--10th May 
        2005).

          In Greek Cyprus, the government's support of a branch 
        of Harvard University's School of Public Health has prompted 
        outcry from the local higher education sector, particularly 
        private universities. Private colleges there have ``long 
        complained of second-class status'' and are critical of the 
        government's plan to ``lavish millions on a prestigious foreign 
        university rather than support domestic providers'' (OBHE 
        Breaking News Article--11th June 2004)

          In Vietnam, government and international donor agency 
        support of foreign institutions (Australia's RMIT and U.S.'s 
        Roger Williams University [whose branch campus in Vietnam is 
        called American Pacific University] has been criticized by 
        locals who argue that ``the funding should have been invested 
        in bolstering the research capabilities of existing 
        universities.'' In addition, critics say that the high tuition 
        charged and only modest scholarship programs offered by the 
        foreign institutions do not serve national objectives to 
        educate more underprivileged students, nor are the `Western-
        oriented' curricula, ESL, and U.S.-based college prep courses 
        relevant to Vietnam (OBHE Breaking News Article--14th January 
        2006).

          The India Institute of Management-Bangalore (IIM-B) 
        was initially thwarted initially the government of India in its 
        effort to accept Singapore's invitation to establish an 
        operation there. ``India's Human Resource Development Ministry 
        did not express the necessary support for the venture (the 
        current charter for the institutions reportedly does not permit 
        offshore operations and would have to be amended) citing the 
        need for all six IIMs to focus on meeting domestic demand for 
        high quality education, rather than spending time and resources 
        catering for students abroad'' (OBHE Breaking News Article--6th 
        February 2006).

           Beyond this specific example, it's interesting to note that 
        ``discussions about foreign provision [in India] seem to have 
        been dominated by rhetoric emphasizing the negative aspects of 
        transnational education. . .However, with significant unmet 
        demand, higher education participation rates of less than 10 
        percent, problems of brain-drain and under-funding. . ., 
        policy-makers may find it hard to employ or uphold a 
        protectionist stance on the import of foreign education. In 
        addition, with (an albeit limited number of) Indian 
        institutions looking to offer courses abroad and a range of 
        bilateral trade agreements with other countries in place, India 
        will find it increasingly difficult to justify attempts to 
        prevent foreign providers from entering the country'' (OBHE 
        Breaking News Article--6th February 2006)

    Proactive host countries have different strategies for attracting 
foreign branch campuses:

          Qatar offers significant financial incentives (OBHE 
        Breaking News Article--2nd April 2003)

          Singapore offers access to Asian markets and the 
        opportunity for incoming institutions to raise their 
        international reputations and profiles (OBHE Breaking News 
        Article--2nd April 2003)

          South Korea (OBHE Breaking News Article--16th 
        September 2005) and Japan (OBHE Breaking News Article--24th 
        March 2006) are exploring special investment zones and other 
        incentives to make themselves more attractive to high quality 
        foreign providers (both are cited in the OBHE branch campus 
        report)

          Thailand touts itself as a safe, central, cost-
        effective location for foreign providers, and is explicitly 
        linking internationalization to widespread systemic reform of 
        the higher ed sector. Interestingly, there was talk of the 
        establishment of a branch of Al-Azhar university to serve the 
        region's Muslim population, but LER can't find any evidence 
        that that's happened yet as of 2007. . . Likewise, OBHE 
        reported that Thailand had been selected to host China's first-
        ever foreign branch campus, affiliated with Jinan University, 
        which focuses on educating China's non-mainland populations--
        but LER can't find any evidence that that's happened yet as of 
        2007. . . (OBHE Breaking News Article--12th March 2004)

    Some countries present special challenges for foreign providers:

          Security questions in the Middle East (OBHE Breaking 
        News Article--2nd April 2003)

          Repressive governments or societies, for example in 
        the Middle East (OBHE Breaking News Article--2nd April 2003)

          Government interference in curricula, for example in 
        Vietnam where Communist ideology course requirements have been 
        instituted (Chronicle of Higher Education, 24 June 2005)

          National language and religious/moral education 
        requirements, for example in Malyasia (OBHE Breaking News 
        Article--11th November 2004)

    Branch campuses can fulfill unique roles in some societies--
consider the fact that such a large percentage of female students is 
enrolling in Qatar's Education City programs (Cornell's Medical School 
program there is 70 percent female). What are the longer-term 
ramifications of this? The unintended consequences, positive and 
negative?
    Increasing geographic diversity for branch campus expansion:

          Netherlands Business School (NBS) in Nigeria (OBHE 
        Breaking News Article--4th April 2004). Why Nigeria?

                          Huge youth population--potential for market 
                        expansion

                          Widespread use of English language in 
                        Nigeria--not a lot of use of Dutch around the 
                        world and the Netherlands already has a lot of 
                        experience providing high-quality academic 
                        programs in English!

                          High unmet local demand for higher education 
                        in Nigeria

                  NBS is starting small and working with a 
                local partner (African Leadership Forum, ALF) with whom 
                it has a compatible mission

                  NBS is targeting individuals in senior 
                positions--LER's thought: wisely taking a low-risk 
                strategy to begin

                  Netherlands has already been ``crowded out in 
                the major Asian markets by universities from Australia, 
                UK and USA'' so they've decided to focus on 
                ``innovation and competitive advantage, whether in 
                terms of subject niches [e.g., technical education in 
                Singapore], cultural affiliations [in Indonesia and 
                South Africa], or underdeveloped markets such as 
                Nigeria''

                  Challenge for Netherlands in Nigeria is the 
                sustainability of economic and democratic reforms on 
                the ground.

          Chile in Ecuador (OBHE, The International Branch 
        Campus, 2006 report)

          India in Singapore and UAE (OBHE, The International 
        Branch Campus, 2006 report)

          Iran in UAE (OBHE, The International Branch Campus, 
        2006 report)

          Ireland in Bahrain, Malaysia, Pakistan, and UAE 
        (OBHE, The International Branch Campus, 2006 report)

          Italy in Argentina (OBHE, The International Branch 
        Campus, 2006 report)

          Pakistan in Kenya (OBHE, The International Branch 
        Campus, 2006 report)

          Philippines in Vietnam (OBHE, The International 
        Branch Campus, 2006 report)

          Mexico possibly in the U.S. (OBHE, The International 
        Branch Campus, 2006 report)

    Field of regional education hubs getting more crowded

          Now four Middle Eastern hubs for transnational 
        education:

                          Knowledge Village (Dubai, UAE)

                          University City (Shar'jah, UAE)

                          Education City (Qatar)

                          Higher Education City (Bahrain, as of 2007), 
                        described in-depth in OBHE Breaking News 
                        Article--16th January 2007

                  and a 5th in planning stages:

                          Academic City, (Abu Dhabi, UAE)

          In Asia:

                  ``Study Korea'' project aims to raise number of 
                international students studying in South Korea from 
                17,000 to 50,000 over the next five years,

                  Australia builds its ``University City'' in South 
                Australia

                  Singapore consolidates its position

                  Malaysia aspires to more international students

                  Thailand trying to position itself as a friendly, 
                lower-cost destination for the region's mobile students

    This involves a lot of branch campus activity--are we reaching/will 
we reach a saturation point here? how many ``regional education hubs'' 
can any one region sustain?--question also raised by OBHE Breaking News 
Article--16th January 2007

Concluding Thoughts

          Commitment and long-term planning seem to be key when 
        it comes to branch campus success. Rather than making the 
        decision to establish a branch campus strictly for financial 
        and branding reasons, it seems that institutions would be wise 
        approach the establishment of a branch campus in almost the 
        same way as they consider the establishment of a fully-fledged 
        new college or university--what role is this institution meant 
        to play over time in a particular set of institutional, local, 
        national, and international contexts? This is actually a very 
        complex question!

          In addition to the significant amount of real 
        activity going on, there's also a lot of ``vaporware'' out 
        there, i.e., there's a lot of talk about branch campuses that 
        never materialize into anything. Branch campuses are big, shiny 
        manifestations of internationalization, but they're not the 
        only part of the phenomenon that matters.

          At the present time, branch campuses, like much else 
        in the broad area of higher education internatinalization, is a 
        ``wild west'' of unregulated, often ill thought out, 
        initiatives by a host of players--governments, private 
        enterprise, academic institutions (for profits and non-profits) 
        and others.

References

    We have not done a thorough scan yet of the journal literature on 
this topic. Our initial impression is that there is very little 
available on this theme. We are in the process of searching the 
periodical literature. Our own Center for International Higher 
Education website is a good starting resource.

Australian Government. (2005). Transnational quality strategy. 
        Retrieved July 12, 2007, from http://www.aei.dest.gov.au/AEI/
        GovernmentActivities/QAAustralianEducationAndTrainingSystem/
        TQS_pdf.htm
Observatory on Borderless Higher Education. (2002, August 6). Breaking 
        News Article--Regulation of private higher education in South 
        Africa: Which foreign providers are left? Retrieved July 3, 
        2007, from http://www.obhe.ac.uk/cgi-bin/news/
        article.pl?id=99&mode=month
Observatory on Borderless Higher Education. (2003, April 2). Breaking 
        News Article--Qatar continues to attract us universities to the 
        Middle East; and an update from South Korea. Retrieved July 3, 
        2007, from http://www.obhe.ac.uk/cgi-bin/news/
        article.pl?id=179&mode=month
Observatory on Borderless Higher Education. (2004, April 4). Breaking 
        News Article--New competition? New market? Dutch university 
        opens branch in Nigeria. Retrieved July 3, 2007, from http://
        www.obhe.ac.uk/cgi-bin/news/article.pl?id=280&mode=month
Observatory on Borderless Higher Education. (2004, June 11). Breaking 
        News Article--Branch campus developments in Bahrain, China, 
        Cyprus, Greece and UAE: Mixed models and reactions. Retrieved 
        July 3, 2007, from http://www.obhe.ac.uk/cgi-bin/news/
        article.pl?id=294&mode=month
Observatory on Borderless Higher Education. (2004, March 12). Breaking 
        News Article--Another `regional education hub' in South East 
        Asia: Thailand unveils its plans as foreign universities pour 
        in. Retrieved July 3, 2007, from http://www.obhe.ac.uk/cgi-bin/
        news/article.pl?id=275&mode=month
Observatory on Borderless Higher Education. (2004, November 1). 
        Breaking News Article--University of La Verne Athens closes 
        three days before the beginning of the academic year. Retrieved 
        July 3, 2007, from http://www.obhe.ac.uk/cgi-bin/news/
        article.pl?id= 323&mode-month
Observatory on Borderless Higher Education. (2004, November 11). 
        Breaking News Article--Malaysia to offer foreign universities 
        greater incentives to open branch campuses, but why has no new 
        branch campus opened since 2000? Retrieved July 3, 2007, from 
        http://www.obhe.ac.uk/cgi-bin/news/article.pl?id=325&mode=month
Observatory on Borderless Higher Education. (2005, January 14). 
        Breaking News Article--One American branch campus and four 
        private universities to open in Vietnam: Government premises 
        its support on developmental grounds, but is boosting capacity 
        enough? Retrieved July 3, 2007, from http://www.obhe.ac.uk/cgi-
        bin/news/article.pl?id=344&mode=month
Observatory on Borderless Higher Education. (2005, May 10). Breaking 
        News Article--Latest cross-border developments in Taiwan: Open 
        to foreign providers but do windows of opportunity remain shut? 
        Retrieved July 3, 2007, from http://www.obhe.ac.uk/cgi-bin/
        news/article.pl?id=378&mode=month
Observatory on Borderless Higher Education. (2005, September 16). 
        Swimming against the tide? South Korea's plans to attract 
        foreign institutions are revised. Retrieved July 13, 2007, from 
        http://www.obhe.ac.uk/cgi-bin/news/article.pl?id=407&mode=month
Observatory on Borderless Higher Education. (2006, February 6). 
        Breaking News Article--Next stop India? A round-up of recent 
        developments in the country's international higher education 
        sector. Retrieved July 12, 2007, from http://www.obhe.ac.uk/
        cgi-bin/news/article.pl?id=523&mode=month
Observatory on Borderless Higher Education. (2006, March 24th). 
        Japanese universities innovate to offset subsidy cuts and 
        declining enrolments. Retrieved July 13, 2007, from http://
        www.obhe.ac.uk/cgi-bin/news/article.pl?id=539&mode=month
Observatory on Borderless Higher Education. (2007, January 16). 
        Breaking News Article--A fifth transnational hub for the Gulf: 
        Bahrain announces plans to create a `Higher Education City'. 
        Retrieved July 3, 2007, from http://www.obhe.ac.uk/cgi-bin/
        news/article.pl?id=608&mode=month
Observatory on Borderless Higher Education. (2007, July 10). Breaking 
        News Article--Reversal of a trend? Australian universities 
        withdraw from offshore teaching. Retrieved July 12, 2007, from 
        http://www.obhe.ac.uk/cgi-bin/news/article.pl?id=657&mode=month
Observatory on Borderless Higher Education. (2007, June 1). Breaking 
        News Article--A miscalculated level of risk? UNSW Asia 
        announces its unexpected closure. Retrieved July 3, 2007, from 
        http://www.obhe.ac.uk/cgi-bin/news/article.pl?id=643&mode=month
Overland, M.A. (2005, June 24). Foreign universities in Vietnam ordered 
        to teach communist ideology. Chronicle of Higher Education, 
        51(42), A32.
Underhill, W. (2006, August 21). Sowing seeds: From Cornell in Qatar to 
        Monash in Malaysia, satellite campuses are a booming business. 
        Newsweek, International Edition.
Verbik, L., & Merkley, C. (2006). The international branch campus: 
        Models and trends. London: Observatory on Borderless Higher 
        Education.

                    Biography for Philip G. Altbach
    Philip G. Altbach is J. Donald Monan, S.J. Professor of Higher 
Education and Director of the Center for International Higher Education 
in the Lynch School of Education at Boston College. He has been a 
senior associate of the Carnegie Foundation for the Advancement of 
Teaching, and served as Editor of the Review of Higher Education, 
Comparative Education Review, and as an Editor of Educational Policy. 
He is author of Comparative Higher Education, Student Politics in 
America, and other books. He co-edited the International Handbook of 
Higher Education. Dr. Altbach holds the B.A., M.A. and Ph.D degrees 
from the University of Chicago. He has taught the University of 
Wisconsin-Madison and the State University of New York at Buffalo, 
where he directed the Comparative Education Center, and chaired the 
Department of Educational Organization, Administration and Policy, and 
was a post-doctoral fellow and lecturer on education at Harvard 
University. He is a Guest Professor at the Institute of Higher 
Education at Peking University in the Peoples Republic of China, and 
has been a Visiting Professor at Stanford University, the Institut de 
Sciences Politique in Paris, and at the University of Bombay in India. 
Dr. Altbach has been a Fulbright scholar in India, and in Malaysia and 
Singapore. He has had awards from the Japan Society for the Promotion 
of Science and the German Academic Exchange Service (DAAD), has been 
Onwell Fellow at the University of Hong Kong, and a senior scholar of 
the Taiwan Government. He was the 2004-2006 Distinguished Scholar 
Leader of the New Century Scholars initiative of the Fulbright program.

                               Discussion

    Mr. Baird. I really thank all the witnesses for just 
fascinating and stimulating discussion on a very intriguing 
topic.
    Dr. Skorton, I especially share your commitment to the role 
of universities and academic environment to international 
collaboration and understanding. You know, one of my goals as 
Chair of the Subcommittee on Research and Science Education is 
the concept of science diplomacy, finding ways where we can 
bridge gaps that may emerge in politics, religion, culture, et 
cetera, and using the science and academic endeavor to bring 
people together.
    Dr. Schuster, I also appreciated very much your insights. 
We tend to look at this as oh my goodness, American 
universities are giving something valuable, that is uniquely 
American, away to the other countries. I think you pointed out 
well that there are many countries that actually do things 
better than us, and we can learn from our presence there, and 
that, thereby, benefits us, because we are not just giving our 
vast superior knowledge in every universal field away. We 
actually can go to places where they are ahead of us, which we 
tend to forget sometimes here.
    Mr. Wessel, I appreciated your comment that policy is both 
science and art. Hang around here long enough, you will learn 
it is more artifact than art. And Dr. Altbach, the historical 
insights are well taken. This is, indeed, not necessarily an 
immediately new phenomenon.
    One of the questions I have is, I have come to appreciate 
the incredible value that has derived to our society from 
foreign students who have come here and gained their 
undergraduate or graduate degrees, and then go back to the home 
country with not only knowledge that they serve their own 
country with, but in many and most cases, I think a deep 
affection for our country.
    As we establish branch campuses overseas, will we see a 
decline in the number of foreign students who come here, and 
hence, a potential indirect decline in that kind of emotional 
tie to our own Nation, that carries all sorts of benefits? Any 
thoughts on that?
    Dr. Schuster. Let me answer first. And that is something 
that is of interest and a little bit of concern to us as well, 
at Georgia Tech. In the programs that we are establishing 
abroad, particularly the graduate programs at the Master's and 
at the Ph.D. level, a part of the curriculum expects those 
students to spend a semester or a year on the Atlanta campus, 
for exactly the purpose that you identified, to give them an 
experience of the American research university and the American 
culture. And we believe that that will strengthen the ties, and 
expand our ability to build relationships, and use science as 
diplomacy around the world.
    Mr. Wessel. I agree with Dr. Schuster. It is hard to say at 
this stage, but the early evidence that we have is actually 
quite promising on this. We opened a campus in Kobe, Japan, 
about two years ago, and I have seen at my school applications 
from Japanese government officials and private sector folks 
actually increased as a result of the increased visibility that 
we have.
    We never had Australian students at our campus, and because 
we have developed our campus in Pittsburgh, and because we have 
developed an integrated curriculum across our two campuses, we 
now have students going back and forth between those two 
campuses, and we have Australian students in Pittsburgh, and 
U.S. students taking part of their studies abroad.
    So, I actually am cautiously optimistic about the impact on 
this in our home campus.
    Dr. Altbach. Actually, I am highly optimistic that there 
will not be a decline in international student numbers coming 
to the U.S. If you look at the projections in the outyears, the 
demand for international higher education, be it from students 
who want to go to a different country, and there are many 
motivations for people who want to go to different countries, 
including immigration, which is going to continue, those 
numbers seem to be quite significant.
    So, I think the establishment of branch campuses of 
American universities overseas will not affect overall students 
numbers coming here, and may, as my colleagues have said, 
actually improve the quality of students coming to this 
country, because they will know better what they are getting 
into, and have an exposure already to U.S. higher education.
    I might point out one other thing slightly related to your 
question, and that is, if you look at overseas student 
enrollments over a long period of time in the U.S., you will 
find that very significant numbers have not gone home, and that 
has benefits to our country, and of course, you know, American 
policy-makers have been concerned about maintaining in some 
ways the numbers from overseas who contribute to S&T in this 
country. But the big sending countries, India and China, over 
time, 75 percent or so of their graduates, this is over 20 
years, have remained in the United States after their 
graduation. So, this is a very significant number, and we need 
to examine what this means for our economy, and of course, what 
it means for their economies, as well.
    And one final little point. That is, to me, the big 
determinant on numbers of foreign students is not branch 
campuses. It is U.S. policy welcoming, making possible for 
international students to come to this country. Visa 
restrictions and all that stuff that you are well aware of.
    Thank you.
    Dr. Skorton. As Yogi Berra has said, or as attributed to 
him: ``It is hard to predict, especially about the future.'' 
And I agree with my colleagues, in terms of the, we are about 
all of the same generation, in terms of how we grew up in 
higher education.
    I want to sound a slightly dissonant note, though, with my 
colleagues. I think that thinking about American higher 
education as an economic sector, just for a moment, we consider 
it a calling, of course, but it is also a business, an economic 
sector. I am not complacent about our ability to continue to 
compete in the world. These are selective schools you see in 
front of you, who get many more applications than we can accept 
students, both domestic and international.
    Overall, we have very, very serious competition from 
international institutions in the developed world, in 
Australia, the UK, Europe, and elsewhere, and a rising tide of 
competition coming from China and India. The Indian government 
has been advised to quadruple the number of universities in 
India over the next 15 years, quadruple. And the population 
changes, the foreign competition, and other matters may make 
the answer to this question different ten years from now than 
it is now. I am not sure what the effect will be.
    There are two other factors. One, to repeat what Dr. 
Altbach said, the ease or lack of ease of getting in the 
country, staying in the country, leaving the country on a brief 
visit, is a very, very tough sweet spot to find. We are all 
concerned about this on this panel. We are also very concerned 
about national security.
    And secondly, I think a very, very important final comment 
is that the ability of our universities to offer something 
unique and different at a cost that people can afford is 
another factor, and I would only speak for my own university, 
and of private universities in the country, that it is a very 
expensive proposition, and the ability of international 
students to find resources to meet those financial obligations 
are also a big challenge.
    So, in summary, I agree that right now, we are not 
concerned that the branch campuses will directly impact our 
ability to share the American experience with people from 
overseas, but I think in the long run, we cannot be complacent 
about this aspect of the American economy, either.
    Mr. Baird. Mr. Hall.
    Mr. Hall. Thank you. Dr. Skorton, your testimony argues 
that the U.S. needs to continue attracting ``the best and 
brightest students, staff, and faculty members to remain 
competitive.'' And in addition, you argue that we ought to 
invest in teaching and research abroad to ``spur economic 
growth.''
    Are these two goals on the same level, mutually exclusive, 
and how can we provide both equal educational opportunities 
abroad, if we are seeking the benefits here?
    Dr. Skorton. Mr. Hall, this is the $64,000 Question. It is 
a balancing act that we have to deal with in this country. I 
call your attention to work by the Business Higher Education 
Forum over the last few years, including a Congressional 
hearing about five weeks ago, about the crisis in the pipeline 
for STEM graduates in the United States.
    And not to take up more than my time, but I am glad later 
to give to the Committee staff abundant data from the Business 
Higher Education Forum and other sources that shows the 
tremendous work that we have to do to maintain a robust 
pipeline of teachers and students in STEM disciplines in this 
country.
    So, I want to say, and I want to make this point very 
strongly, we do need the best and the brightest from overseas. 
Depending on the American university that one talks about and 
looks into, perhaps as much as 50 percent of the graduate 
student population in some mathematical, physical science, and 
engineering disciplines, and perhaps as much as 30 percent of 
the graduate student population in some life science 
disciplines, are international in focus. So, I need, and I 
would hasten to say we need the brightest international 
students for our programs.
    By the same token, these cliches about the world being flat 
and so on are actually true, and just as multinational 
corporations do everything from R&D to marketing to product 
development around the world, so innovation is an international 
phenomenon. And so, in fact, I don't really see them as 
mutually exclusive. The question will be, as we build up the 
strength overseas, will we bump into each other going in the 
door? That is what you are asking me. Right now, the answer is 
no. Make no mistake about it. We accrue the main benefit in 
this country of international collaborations, but we have to 
keep an eye on it, and we do not collect data as robustly and 
crisply to answer many of the questions that you have raised.
    Mr. Hall. And the cost, and the other question by the 
chairman here, are the costs equivalent to the U.S., campus 
costs for an attendee, are they equivalent to our cost here, 
that you charge them to attend?
    Dr. Skorton. I wouldn't want to speak broadly about all 
branch campuses, but we are, I believe it was Dr. Schuster who 
used the word revenue-neutral, and the idea would be whatever 
the costs are, and they are going to depend on the sort of 
operation that it is, it will cost a different kind of expense 
to train a physician or an engineer than it will cost to train 
someone in a humanities discipline or a social science 
discipline. But I think in general, we have to operate under 
the idea that it will be revenue-neutral. And so overall, 
whatever the cost of education is, we have to find a way to 
retire that.
    I know you know this, Mr. Hall. I just want to remind you 
that the cost of paying for higher education in this country is 
a complicated crazy quilt of the tuition paid, which does not 
cover all the costs, philanthropy, and enormous public 
investment. At Cornell, a private university, we get nearly $1 
billion of public money a year, in the form of research grants, 
student aid, money from the State of New York. And so, this 
combination of tuition, grants and contracts, philanthropy, and 
other procedures, all have to add up to a nonprofit bottom 
line. So, in general, the costs have to be borne, but the 
various weighting of those factors, how much will be from the 
different factors on different campuses, will depend on the 
discipline, the costs, and the overall capability of the 
institution.
    Mr. Hall. I keep reading and hearing the media keeps 
shouting back at us, the escalating cost of sending your 
youngster to school, and how we better be saving for, you know, 
that when it is the fourth or fifth grade now and looking ahead 
for it.
    Do you ever have any situations where some of us Americans 
send ours over to your school there, and could they attend 
there? Would that be one way of us cutting down on the 
escalating cost of graduating from, say, Cornell?
    Dr. Skorton. I am going to give you a firm yes and no 
answer to that one.
    Mr. Hall. Okay. Okay.
    Dr. Skorton. Yes.
    Mr. Hall. It is probably not a fair question.
    Dr. Skorton. Everything is fair. Yes, certainly, American 
students are eligible to go to many of these campuses, although 
the idea, of course, is to establish a footprint in another 
society. We do have work to do in higher education, on the 
balance between cost control and funding, and just because I 
have garnered the floor, and I will say very quickly in 30 
seconds, it is a three part solution to the problem that you 
have raised.
    We need a commitment from you and other Members of our 
elected officials to make sure that public money continues to 
go to student aid in this country. We cannot fail to do that, 
no matter what other economic challenges we have. Secondly, our 
own alumni have to help us with philanthropy, and thirdly, I 
know that I have to do a better job of cost containment going 
forward. I wouldn't say that about my colleagues, but I know I 
have to do a better job of cost containment.
    Mr. Hall. And in closing, what better way can we spend our 
money? And my last question, and I don't expect an answer for 
it, is for a state institution overseas, who do you consider to 
be out of state? I will withdraw that, and I will yield back my 
time.
    Mr. Baird. Mr. Lampson.
    Mr. Lampson. Thank you. Thank you, Mr. Chairman. Mr. Hall 
always comes up with the hardest of the questions.
    I happened to be in a meeting, and I stepped out for a 
minute. Last week, we were in a hearing, and I saw a group of 
college students sitting in the audience, talking or listening. 
On the panel, I decided to go out and listen to the kids. And I 
found it pretty fascinating, what their insight was. And the 
group of young folks that I met with are now sitting in the 
backroom over there, helping me design a program that will 
implement what their vision is, and hopefully, we will succeed. 
It really is about the students and what they can get out of 
that, and what we would like to see happen into the future, as 
far as I am concerned.
    And I was wondering about, because what we see happening 
with other nations building their own universities, are there 
any that have built branches in the United States from their 
universities, that you are aware of?
    Dr. Altbach. Very briefly, there are rumors that a couple 
of Mexican universities are opening, or planning to open branch 
campuses in Hispanic areas in the United States to serve 
Spanish speaking students in the U.S. But those are, so far, 
unconfirmed. The short answer to the question is no.
    And this is an interesting broader policy issue, actually, 
because in my view, there isn't much potential. The higher 
education environment in the United States is so complex and 
so, generally speaking, good, and so varied across sectors, it 
would be difficult for an international, a foreign institution, 
to come here and make a success of it. The British Open 
University actually tried, a few years ago, using their brand 
of distance education, to come into the U.S., and failed.
    So, I think broadly, the answer is no.
    Mr. Lampson. I am hoping that the example that you said, or 
the rumor was, is not an example of North-South that you 
explained a minute ago. Do you have a comment, Mr. Wessel?
    Mr. Wessel. I don't know that they have actually set up 
branches here, but I know we have a relationship with Tecno 
Monterrey in Mexico, and they have very assiduously pursued 
student markets, particularly in the Southwest United States, 
for their programs, including in partnership with some U.S. 
institutions.
    Mr. Lampson. Are you having the kinds of difficulties when 
students, when it comes to the time that a student who is in 
your branch needs to spend time here, on your main campus here 
in the United States, how difficult is it for them to receive 
the visas necessary, or the other visiting documents necessary 
for them to come? Anyone. Dr. Schuster.
    Dr. Schuster. Yeah. I can't speak directly to the specific 
cohort of students who would be coming from branch campuses, 
but I think everybody at this table, and I suspect that 
everybody in the room is aware of some of the challenges that 
higher education has faced, in being able to have visas issued 
in a timely way to appropriate students, and any assistance 
that you might be able to provide to us in resolving that 
problem, we would greatly appreciate.
    Mr. Lampson. Well, I want your comment, but has it had an 
impact on the financing of our universities? Both of you may 
want to comment it, or anyone. Go ahead, Dr. Skorton.
    Dr. Skorton. First of all, I would like to separate the two 
questions. The overall question, as my colleagues have said, 
about the accessibility of the U.S. to international scholars 
and students continues to be an area of concern. I wouldn't 
want to be in your seat trying to decide exactly where to find 
that sweet spot, but I think the pendulum swung a certain 
distance before and immediately after 9/11. It has swung back. 
We have had a lot of terrific dialogue from the higher 
education community, with the Department of Homeland Security, 
and with the State Department.
    I am honored to be in the National Security Higher 
Education Advisory Board, which was appointed by the Director 
of the FBI, and there is about 20 university presidents on that 
Board, and the whole point of that was to initiate better 
dialogue. So, I think that things are going in the right 
direction.
    The branch campuses are a special case. It is a small 
number of students, relative to the large number of 
international students who come here, and we have it set up in 
advance as a prescribed program. So, for example, we have 
students right now in the summer, in Ithaca, New York, and in 
New York City at the Medical School of Cornell, Weill Cornell 
Medical College, from the medical school and premedical program 
in Qatar, international students, and we have been able to do 
that.
    So, two separate questions. I think focused approaches to 
programs, where it is clear, the length of time the student is 
going to be staying. It is all worked out ahead of time. We 
have had a lot of cooperation. It has been more manageable. The 
overall issue of visas and so on, is still trying to find what 
the right balance is. It is difficult.
    Mr. Lampson. There is talk that China has built a 
significant number of new universities. They are attracting a 
lot of the world's students, Australian, perhaps other 
countries. It is obviously something for us to worry about. Do 
you have any comments? Do you advise that we ought to be 
looking at it, as a Congress, to help change any aspect of 
that?
    Dr. Altbach. If I can reflect on that. China, and India, 
too, are beginning to have strategies to attract students from 
other countries to those countries. My own view is that they 
will not be tremendously successful. The issues of quality of 
higher education, language questions, ease of study, the 
attractiveness of those cultures and so on, are such that it 
will be a bit difficult for them to attract the numbers that 
they seem to be thinking about. So far, there isn't much going 
on in that area, but there will be, and we should be careful to 
monitor it.
    My own view is, so long as U.S. institutions maintain their 
quality, maintain their attractiveness, and maintain their sort 
of general excellence overall, we will do very well in 
international competition in higher education. We start with a 
huge advantage. Our issue here is to maintain that advantage. 
We are at a good place, if we continue to be aware of the 
issues, to support the institutions, to provide rational 
access, in terms of immigration and visas and that sort of 
thing, we will do well. I am pretty optimistic about that.
    There is a lot of competition out there. The Australians, 
the British, the New Zealanders, they particularly, at the 
present time, are the big competition. They are doing pretty 
well. They have some problems. Australia, particularly, right 
now, which I think over-invested and didn't take the care that 
they needed to in establishing some of their overseas twining 
and branch campuses and franchising. So, it is coming back to 
bite them a little bit.
    But so long as we maintain our excellence and 
attractiveness, we will do fine.
    Mr. Lampson. Thank you, Mr. Chairman.
    Mr. Baird. I am going to recognize Mr. Inglis.
    Mr. Inglis. Thank you, Mr. Chairman.
    Several years ago, we had an exchange student at our house 
from Turkmenistan. While he was with us, the Turkmenbashi, the 
guy that ran Turkmenistan, closed all the hospitals in 
Turkmenistan, and said if they are sick, they can come to the 
capital. And that gives you an idea about where this guy comes 
from. And I said to him, Sadar, how long does it take to get 
from your town of Mari to the capital? He said two hours. So it 
gives you an idea of the conditions, maybe, in Turkmenistan, 
that if you are having a heart attack in Mari and you need to 
get the capital, it is two hours away.
    And the last night that he was with us, he came into my 
little office at our house, and he said sir, I want to come 
back. He said it is possible, in this country, for ordinary 
people to send their children to college. In my country, it is 
not possible. So, will you help me come back?
    Of course, it is quite a show stopper for me. Last night, I 
got a call from my wife, saying what are we going to do with 
Sadar, because we just got an email from him saying will you 
help me? It would cost me $2,600 a year, and $150 a month, to 
go to the American University of Central Asia, and we have got 
five kids, and one has finished college, one is in college, one 
is going next year. And so, my wife says, maybe we can help 
Sadar. I suppose that Sadar, in some ways, is somebody that 
fits some of this. It is a way of offering him an opportunity.
    Is the goal to make it more cost effective for him, or to 
expand the reach of your universities, or both?
    Dr. Schuster. I think everybody is moved by the sort of 
stories that you just related, and the truth is, and I think 
most of us in this room know that there are thousands and 
thousands of those stories of qualified, ambitious individuals 
who are just looking for an opportunity to succeed. And part of 
our motivation is to provide those opportunities around the 
world.
    I want to come back to this question of what it is that 
attracts foreign students to American universities, and what it 
is that we are trying to propagate by moving some of our 
operations offshore. And it comes down to two important issues, 
I believe, quality and culture. And it has been said by my 
colleagues here, and I thank you very much for the compliments, 
by characterizing American universities as the gold standard of 
the best in the world, and I think that is certainly true, and 
is well recognized.
    And the question becomes, of course, well, what is it that 
drives that? What is it that makes the American universities 
recognized globally as the leader? And why is it that I think 
personally that universities established in India, whether they 
quadruple the number, or in China, will not become competitive 
quickly, and the answer is culture. And I think that the 
opportunity to succeed in a meritocracy, rather than a culture 
of hierarchy, is one of the great strengths of the American 
university. It is open. It is a competition of ideas, not of 
age or of birth or of status or of title, and I think that the 
examples of history inform us of that. American universities 
have been the entry point for immigrants to the United States, 
to gain an education, and to become successful and leading 
citizens.
    And part of our objective in moving offshore is to provide 
that opportunity for students, like the one that you describe, 
in their home country.
    Mr. Inglis. And see, the challenge for somebody like Sadar, 
is getting the opportunity to come here. I think we can get the 
visa, right? It is relatively open, that is my impression. Is 
that correct? And coming here is obviously more expensive than 
being educated at the American University of Central Asia, if 
he has got the price right, at $2,600 a year plus $150 a month. 
But still, that is a large sum of money if you are in 
Turkmenistan.
    Mr. Wessel. So, I just wanted to make one connection on 
this issue of students coming here. One of the real primary 
reasons students come to universities in America is to access 
the U.S. labor market. They certainly come for the training 
that we offer, and the skills enhancement, but it is much 
easier for them to get jobs in U.S. companies through being in 
school here, than if they do their study abroad.
    One of the problems on the visa side that I see is not so 
much student visas, although that can be an issue, but the 
reliability of our system to provide work visas for highly 
talented foreign nationals actually influences the choices 
people make when they decide where they are going to come to 
college. And that has been a much more highly variable 
phenomenon, particularly over the last few years, and I think 
it is a very difficult question, for reasons Dr. Skorton 
outlined, and others.
    But I think it is a really important for us to pay 
attention to.
    Mr. Inglis. And Mr. Chairman, I would be happy to entertain 
any offers of grants and aid at this point. Just kidding.
    Mr. Baird. Mr. Inglis, I appreciate it. I think we are all 
appreciative of your support for that student. I want to 
recognize Mr. McNerney.
    Mr. McNerney. Thank you, Mr. Chairman. I want to thank all 
of you for coming out here this morning. I know you all have 
busy schedules, and your testimony has been very interesting 
and enlightening.
    Dr. Skorton, have you found a need to create private 
institutions or private entities to carry out creating overseas 
institutions, and to operate and own those institutions?
    Dr. Skorton. You mean entities separate from Cornell 
University?
    Mr. McNerney. Private institutions that could be associated 
in some way with Cornell, but yes, separate?
    Dr. Skorton. No. We haven't been, if you have a chance, or 
your staff, to look at a checklist, an appendix that I put in 
my prepared remarks, we have made public exactly what sort of 
due diligence we do when trying to figure this out. We have 
been quite open about it. We share it with other universities 
who have thought about going, for example, into Education City 
in Doha. We have been able to do that through the normal 
mechanisms of the corporate structure of Cornell.
    But there is a lot of detailed due diligence that goes into 
that. If you have a chance, sir, I would be glad to respond, is 
laid out in that appendix.
    Mr. McNerney. Sure. Now, that we are talking about the due 
diligence, you indicate that there is a need to have a 
compelling, or you want a compelling reason to open up an 
institution. What sort of framework do you use to make that 
decision that something is compelling or not?
    Dr. Skorton. By compelling, I mean that there is a 
rationale in the local context, that is, we are filling a need, 
even if it is a competitive need, in the culture or society. 
So, for example, in the case of the Medical School in Qatar, 
there was a perceived need, a perceived market, if I can use 
that term, for an American medical degree in that part of the 
world. It is the first coed institution in Qatar, and as is 
indicated in the appendix, we have retained the right to 
utilize nondiscrimination policies, as we do in the United 
States and the State of New York, to apply to hiring, and to 
admissions decisions in that culture.
    So, part of it is, by compelling, I mean that there is a 
need or market or niche that looks like it would be important. 
Another compelling need would be on the research side, as Dr. 
Schuster has said, and I can't emphasize this too much, the 
ability to study certain problems that are best studied in a 
certain environment, or best studied jointly.
    And so, that is what I meant by the idea of compelling.
    Mr. McNerney. Thank you, Dr. Skorton. Yes, Dr. Schuster.
    Dr. Schuster. Let me add to and amplify what Dr. Skorton 
has said. One of the first criteria is that we be invited. We 
want to be wanted by the government, by the structure that asks 
us to be a partner or a participant in the foreign country in 
which we plan to operate, and so, we don't want to look as 
though we are colonists or invaders. We want to be invited in.
    Another criterion is that we want to make sure that we set 
up an operating environment and an operating structure in which 
we can maintain our quality and our ethics. As Dr. Skorton 
said, we will not operate in a way which will violate our 
principles. Quite important is the opportunity to take 
advantage of unique resources or challenges within a country. 
And so, for example, I suspect you are all aware of the 
challenges associated with water quality and water 
distribution. We have faculty working in Africa, in Central 
Africa, on water distribution, advising governments, advising 
governments in the Middle East on water quality and water 
distribution opportunities. And that turns into opportunities 
for our faculty members to participate in the solution of some 
of the most challenging problems the world faces.
    Mr. McNerney. So, there is a humanitarian aspect to this 
decision-making as well, then, it sounds like.
    Dr. Schuster. It is one of the components, sir, in which we 
weigh the opportunities. I think that many of us at this table, 
I suspect of all us at this table, will tell you that rarely 
does a week or a month go by where we don't get an inquiry from 
some entity in a foreign government, asking for a partnership 
at some level, and I like the phrase that Dr. Altbach used, 
McDonald-ization. That is not a role that we want to 
participate in.
    Mr. McNerney. Dr. Altbach, I wanted to ask you this. You 
mentioned regulation several times. Could you elaborate on what 
that means, or is that too specific to the country that you are 
locating in?
    Dr. Altbach. Yes, it is specific to the countries in which 
you are locating. Each country has a different regulatory 
environment, or in some cases, no regulatory environment, or in 
other cases, they are thinking it through. And it becomes very 
complicated for U.S. or other foreign institutions, which are 
thinking of locating a branch campus in any given country.
    India is a prime example right now. They are thinking 
through how they want to regulate, how they want to recognize, 
and how they want to permit foreign academic institutions 
coming into the country. China, for a long time, has had the 
policy of insisting, and I think it is not a bad policy, 
actually, insisting that foreign institutions that wish to come 
in to China must partner with a local Chinese institution. They 
can't do it on their own, and they are thinking of changing 
that, so as to make it possible for free-standing branches to 
come in.
    But the point of my comment is that there is a range of 
different regulatory environments. They are changing. Some of 
them are not exactly uncorrupt, and institutions which are 
thinking of going into a country need to be concerned about 
these matters.
    If I can make a couple of other reactions to points that 
have been----
    Mr. McNerney. I am going to ask you to refrain, Dr. 
Altbach.
    Dr. Altbach. Okay.
    Mr. Baird. If the opportunity arises in a second. I guess 
we are over Mr. McNerney's time.
    Dr. Altbach. Sure.
    Mr. Baird. And I want to give time to all the panelists 
today. So, Mr. Gingrey.
    Mr. Gingrey. Mr. Chairman, thank you, and the chairman 
whispered in my ear when I came to the Ranking Member's seat, 
and he said, you are not going to try to out-anecdote Mr. Hall, 
are you? He was a little surprised when I told him I did have 
an anecdote. It is about Dr. Schuster. In fact, Dr. Schuster, I 
was reading in your bio, and I want to share this with 
everybody that is in the room, that Dr. Schuster has published 
more than 230 papers in peer reviewed scientific journals on 
many topics, but one of his best-known discoveries is called 
Chemically Initiated Electron Exchange Luminescence. It 
provides a mechanistic basis that allows the understanding of 
the bioluminescence of the North American firefly. This 
discovery forms the basis for new clinical diagnostic 
procedures that have recently been commercialized. Well, I want 
to, here is the anecdote.
    Dr. Schuster, when I was 12 years old, I had a great idea. 
It was during the summertime, and my cousin and I were catching 
these fireflies. We called them lightning bugs. And my parents 
were going out that evening with his parents to dinner, and I 
knew when they got back they would enjoy a cocktail before 
going to bed, so me and my cousin decided that we would try to 
freeze these lightning bugs and put them in an ice tray. And 
our idea was, of course, to freeze them in the luminescent 
phase, and what a surprise that would be when they went to mix 
their drinks later on that night.
    Unfortunately, all these fireflies went dark, and they were 
just dead bugs inside these ice cubes. Now, fortunately, I 
slept through that spanking, but I would just like to say that 
I think if you have cashed in on this, I would like for you to 
share some of those royalties with me, because that is the 
anecdote. Now, I do have a serious question, though, and this 
is a very serious, serious hearing, and----
    Mr. Baird. I promised the witnesses this would be an 
erudite panel here today.
    Mr. Gingrey. Well, we wanted to lighten it up a little bit, 
Mr. Chairman. No pun intended, of course.
    But really, the question is, and of course, Dr. Altbach, I 
think, pointed to it when he said that 75 percent of the 
graduates, foreign nationals that come here on student visas, 
and in graduate programs, Master's or Ph.D. programs, have 
remained in the country after they have completed their 
studies.
    And you know, there is good and bad in that, and my 
concern, and we have discussed this with other panels before 
this committee, and certainly, when I was on the education 
committee in a previous Congress, we talked about it, in 
dealing with the higher ed sections, the brain drain, and the 
fact that you know, they come and they stay and they compete, 
and maybe, they are possibly paid a little bit less, it is a 
disincentive, I am afraid, to some of our best and brightest in 
this country to proceed STEM education, maybe even when they 
need to be thinking about it in the middle of the high school 
level, because gee, you know, lawyers and doctors, and 
certainly not politicians, make more money than engineers and 
pure scientists and chemists and biochemists, and I would like 
any and all of the witnesses, in the time remaining, I took too 
long for the anecdote, but if you can respond to that, because 
it is a concern.
    Dr. Altbach. Since I made the initial comment. First of 
all, I was talking about China and India specifically. It is 
not true overall. Many other countries have significantly 
higher rates of return, even developing countries, of students 
who get their degrees here and do go back.
    I don't like to refer to, any more, to what used to be 
called the brain drain, because I think the situation now in 
the era of globalization, and I will try to be really brief, 
because this is a really big issue, is now much more 
complicated, and individuals who stay in the United States, 
especially from rapidly developing countries, increasingly have 
important relationships back home, and that benefits their 
economy, and it benefits our economy, and it greatly benefits 
them. There is much more going back and forth, so to be brief, 
although the stay rate is declining modestly, more are going 
home as there are opportunities in their home countries, but 
even those who remain are much more engaged in the global 
economy, and that benefits us and it benefits them.
    Mr. Wessel. I agree with that, and I would also say there 
are pieces of evidence from our experience, and this relates to 
our graduate programs in information technology management. 
There is no evidence that our international student graduates 
earn less money when they graduate than our domestic student 
graduates. They are treated quite similarly on that scale.
    And we go out of our way, including additional financial 
support, to try and attract qualified U.S. citizens to these 
programs, and it is a serious, serious challenge. And that, 
despite the fact that we fund them more generously than we 
would, on average, an international student of the same 
caliber. It is a real challenge for us.
    Mr. Baird. Very excellent question, and delightful anecdote 
as well. Mr. Wu.
    Mr. Wu. Well, since we seem to be in the anecdote business 
today, let me jump in with one of mine.
    I don't know if this story is really true or not, but it is 
a story that Chinese kids are told, and I suppose there is a 
point to it. The story is that silk technology left China 
because of, depending on your point of view, a courageous or a 
treacherous Chinese princess, who carried the silk cocoons, the 
silkworm in their cocoons, in I don't know, a bouffant hairdo 
or something like that, and she snuck the cocoons in there, and 
carried them down the Silk Road, enabling other countries to 
start competing silk industries. And the reason why she so 
carefully hid those cocoons is because, so Chinese children are 
told, there was a death penalty imposed for exporting silk 
technology from China.
    Now, whether that is true or not, I thought I would just 
share that story with you all, as you consider exporting 
American know-how to other countries. The world has progressed 
in many respects, but some of the old lessons, well, they are 
old lessons, because there may be a grain of wisdom, or not, as 
the case may be, and I just offer up that story. Well, the 
story kind of speaks for itself.
    Before you all raise your hands to comment, I want to pitch 
something else to you all, which is a way to enhance student 
financial aid at no cost to the taxpayer, which is tied to 
bringing additionally qualified folks to the United States.
    Chris Cox and I proposed this in 1999, and we almost got it 
passed, but we got caught in a three way squeeze at the plate, 
and it didn't quite pass, but we are running it back up the 
flagpole, and just wanted you all to be aware of it. The 
proposal is to grant an additional quantum of H1B visas, and as 
you all know, businesses petition for the visas on behalf of a 
beneficiary. The petitioner would be required to make a payment 
to an accredited college or university in the amount of the 
then-existing Pell Grant. Let us just call that, today, $5,000. 
As you know, petitioners today, recruiters pay $100,000, 
$200,000, to bring an employee in, to find a qualified 
employee, pay the moving costs, and all the other associated 
costs, so $5,000 a year is, on a comparative basis, chump 
change. And every high tech operating executive I know is 
strongly in favor of this proposal. Their lobbyists here in 
Washington sometimes sing a slightly different tune.
    The way that this would work is that they would come to 
qualified universities and lay down their $5,000. You would 
certify that they had done so, and the immigration authorities 
would give expedited processing to their visa petition, and in 
this case, expedited processing would probably work, because 
most of the time, the folks that they are looking for are 
already at your institutions, and all the pre-clearances could 
have been done well in advance.
    I continue to think that this is a good idea, and we are 
going to pitch it up as part of a broader immigration package, 
and I have brought this to the attention of various educators 
and high tech folks, back in 1999 and 2000, and the education 
community was very, very enthusiastic. The high tech community, 
at the operational level, was very enthusiastic. At the 
lobbying level, back in 1999, they called that an additional 
tax. We responded that it was not a tax, it was a voluntary 
payment. They seemed to have come around, because in 2007, no 
one is saying the ``T'' word anymore, but they do want a credit 
for prior donations made, and our response has been, well, 
actually, we would like to see fresh cash on the barrelhead, 
because we want to see that for college financial aid, and by 
the way, the legislation, as drafted, would require you all to 
pass that on, dollar for dollar, through to American students.
    And just wanted to make you all aware of that. While not 
giving up my place in the queue of the anecdote business, 
either. And with that, Mr. Chairman, I yield back the balance 
of my time.
    Mr. Baird. Mr. Rohrabacher.
    Mr. Rohrabacher. Thank you very much, Mr. Chairman. First, 
I would like to mention that, I know that Cornell University is 
very involved in Arecibo telescope project in Puerto Rico. I 
consider that a very good example of the type of positive 
impact that our major universities can have in really practical 
terms.
    And I would alert the rest of our committee to the plight 
of that particular project, in terms of funding, and I believe 
that it is important for us to work with you to keep that 
project alive. So, that is the good part of my questions.
    Now, the other shoe is going to drop in a minute here. I 
will have to tell you, Mr. Chairman, I find a lot of talk about 
globalization to be cliched, and I am going to have to tell 
you, the testimony today hasn't changed my opinion of that. And 
you guys are from major universities. Frankly, I didn't find 
depth in your remarks at all about globalization.
    Let me tell you, the people of the United States pay for 
our universities, by and large. This is not a public service to 
foreigners. Billions of dollars spent for higher education by 
the American people are meant, first and foremost, to educate 
our young people, to provide skills for American young people. 
We should have no apologies to make about that, and the sort of 
glancing over the negative impact of what is happening in some 
areas, in terms of having foreign students in the United 
States. The cliche about we live in the global world now just 
doesn't cut it with me.
    But let me ask you this. First of all, before I, as I get 
into the last question, which focuses on the real problem here, 
what are these foreign students studying? Are they not, many of 
these students, from China, for example? Being trained to take 
basically, information and research information back, which we 
have spent billions of dollars to develop in the United States? 
Are we not, then, putting this into their, this human computer, 
so they can go home and utilize that, in some cases, in their 
military, in order to put the United States in jeopardy? Is 
this not something that we should be concerned about? Because 
what I understand is many of these foreign students at the 
graduate level are taking the hard sciences, which permit them, 
the information, that can help with their military and their 
war industries.
    Please go right ahead.
    Dr. Skorton. First of all, Mr. Rohrabacher, I want to thank 
you for bringing up Arecibo, and I very much appreciate your 
support of that project.
    At the risk of being impertinent, I want to disagree with 
the last comment that you made.
    Mr. Rohrabacher. Please disagree.
    Dr. Skorton. Okay. Okay.
    Mr. Rohrabacher. I am here for that.
    Dr. Skorton. And I am going to do it from the perspective 
of reassuring you, number one, and I hope this doesn't sound 
like a platitude, but I am proud to be on that National 
Security Higher Education Advisory Board. The whole point of 
that, appointed by the Director of the FBI, is for us to roll 
up our sleeves, so to speak, and work on these very problems 
that you are talking about. There is no question that what you 
have raised is a potential concern, no question about it. And 
there is no question that both industrial espionage and other 
kinds of espionage is a concern on both sides of the street.
    Mr. Rohrabacher. Well, this isn't espionage. I think we are 
handing people over things----
    Dr. Skorton. That is the part that we have to do a good job 
on our side of doing it, but what I, the part I want to 
disagree with you about is that I believe that the American 
public is putting money into universities certainly to educate 
Americans. Absolutely no question about it. But these kind of 
universities, research universities, you are, especially 
through this committee, thank goodness, putting hundreds of 
millions of dollars, billions of dollars, depending on the 
agency, for research that leads to innovation.
    And we have a complex innovation network, and I am sorry to 
hit you with a cliche that seemed to upset you, but it is true 
that we are living in a global world, and that we need, it is 
true we need the best and the brightest to work on these 
complex problems.
    Mr. Rohrabacher. But don't we have a pool, a great pool of 
Americans? By the way, we are Americans of every race, every 
religion, that is what is great about America.
    Dr. Skorton. I am a first----
    Mr. Rohrabacher. They come from everywhere. Don't we have a 
large pool of Americans that could then be trained, rather than 
having to bring these people in from overseas, to take, to 
participate in this, and adding value to their existence?
    Dr. Skorton. Well, I think we are all facing the same 
direction you are trying to face. I am a first generation 
American, first generation through higher education. 
Unfortunately, we are not doing as good a job in the STEM 
pipeline in this country as we need to be. And I feel silly 
telling this committee about it, since you have been supportive 
of bills like H.R. 362, the 10,000 Teachers, 10 Million Minds 
Act, in Title I, that if you keep doing what you are doing in 
this committee, you fund these federal agencies for research 
that will lead to innovation, you help us fill up the STEM 
pipeline, then what you are talking about may come to fruition 
some day. Right now, I need the brightest international 
students to fill out the programs that we have at our 
university, and no, I am sorry to say that we are not doing a 
good enough job in the STEM pipeline in this country, and I am 
glad afterwards to share with your staff the data that----
    Mr. Rohrabacher. Just so you know, I have been very 
supportive of our efforts to provide scholarships for graduate 
level students, provided to make sure we meet these scientific 
needs in our country, so that NOAA and NASA and the rest of 
these organizations could actually provide scholarships to make 
sure that our people are being trained.
    And I think to the degree that we have to bring in 
students, foreign students, in to fill these slots, rather than 
training Americans, is a symbol of failure, not something that 
we should be bragging about.
    Thank you.
    Mr. Baird. I thank the gentleman.
    One of the things I particularly value about Mr. 
Rohrabacher is a willingness to present other sides of the 
story that need to be presented. Very well said, and well 
responded to.
    I think at this point, we have heard a number of important 
insights, and a fascinating, fascinating hearing on what is 
clearly going to be a growing trend, I think, and with 
important implications.
    Unless there are any urgent final comments or questions 
from the panel, if other Members of the Committee wish to 
submit comments, or if the members of our panel wish to offer 
additional remarks, we appreciate very much your time and 
testimony and your work. And we look forward to seeing you 
again, hopefully down the road.
    And at this point, the Committee stands adjourned. Thank 
you very much.
    [Whereupon, at 11:35 a.m., the Committee was adjourned.]
                               Appendix:

                              ----------                              


                   Answers to Post-Hearing Questions




                   Answers to Post-Hearing Questions
Responses by Gary Schuster, Provost and Vice President for Academic 
        Affairs, Georgia Institute of Technology

Questions submitted by Chairman Bart Gordon

Q1.  How do STEM programs offered at foreign campuses affect the 
offshoring of STEM jobs? Are we exporting one of the principal sources 
of our comparative advantage? What policy changes need to be made to 
ensure that the globalization of universities is in the national 
interest?

A1. The comparative advantage that the United States enjoys in 
innovation comes from many sources, including our culture of 
entrepreneurship and our ability to leverage discoveries made in the 
United States and elsewhere. Our country's key advantage is not having 
the knowledge itself, but in knowing how to use it. Georgia Tech's 
students and faculty also gain a comparative advantage from Georgia 
Tech's position as a national and international institution. As one of 
the nation's top ten public universities and its largest producer of 
engineers, we focus on educating graduates who understand technology in 
a global context. We hear from the corporate sector that they need 
graduates with both technical skills and experience and appreciation of 
global marketplaces and work environments. Our graduates are highly 
sought after by employers, and our alumni report that the international 
aspects of their education add value to their careers. Our researchers 
benefit from awareness of the international state of scientific 
advancement and from collaborations enabled by Georgia Tech's open and 
outward-looking approach. Producing these kinds of graduates and 
enabling our faculty to perform research at the cutting edge assists 
the State of Georgia and the U.S. in attracting companies to our region 
and driving U.S. competitiveness.

Q2.  In Mr. Wessel's written testimony, he notes that ``the degree to 
which the public sector is willing to provide subsidy for 
[universities'] activity has declined--at least relative to the overall 
cost of providing. . ..research and education output.'' Has this 
decline affected the way universities view their relationship to the 
society that those public-sector subsidizers represent? Who do today's 
universities regard as their stakeholders?

A2. Georgia Tech is proud to be considered one of the country's best 
public universities, and fluctuations in the level of public sector 
contributions do not affect the role played by the public sector as a 
key stakeholder. As a public institution, a central tenant of our 
strategic plan is that we will grow and adapt to new circumstances in 
order to continue to be an educational and economic driver for not only 
Georgia, but for the Nation and the world. To serve all of our 
stakeholders, we must constantly tune our educational and research 
strategies to reflect current realities. Successful universities of the 
future will be defined by their ability to build learning and research 
communities that are multi-disciplinary and multi-institutional and 
that cross their own traditional boundaries as well as those among 
industry, government, and academia throughout the world. Extending 
Georgia Tech into the global environment is therefore a natural step in 
providing service to our students, the State and the Nation.

Q3.  Asserting that ``there are too many universities in this 
country,'' Mr. Wessel stated in his prepared testimony that ``the 
emergence of new markets abroad. . .offer[s] opportunities to take 
advantage of inherent economies of scale without jeopardizing the 
branding and selection fundamentals of our business model at home. 
Thus, for many of us, going global is simply efficient.'' Sloan 
Foundation President Ralph Gomory has pointed out that one of 
globalization's effects has been to drive a wedge between the 
fundamental interests of multinational corporations and those of the 
national economies in which they are based. Is the drive for efficiency 
described likely to lead to a similar split between major universities 
and their home societies?

A3. Georgia Tech's home society is primarily composed of local, State 
and federal stakeholders, students and alumni, and the private sector. 
This society is well served, in our view, by a strategy that expands 
educational and research opportunities internationally. As noted in my 
remarks at the hearing, as the Nation's largest producer of engineers 
and one of its best, we face the challenge of preparing our students to 
contribute to and compete in a global economy based on innovation. The 
State of Georgia does not exist in isolation to the world but 
constantly seeks international business and investments. While the 
United States is undoubtedly the world's leader in innovation, it is 
not the only place in the world creating new ideas and technologies. 
Accessing these ideas and innovations is also an important aspect of a 
global presence. Challenging our students and exposing them to broad 
experiences, as well as enabling researchers to be present at the 
global intersections of research and innovation, will bring benefits 
back to our ``home society'' by way of economic development and talent.
    Corporate recruiters and research sponsors operate in a multi-
cultural, multi-linguistic and multi-domestic environment. It is a 
reality for them and, increasingly, a reality for STEM graduates. Our 
graduates are asked by their employers to operate in global 
marketplaces and diverse cultures. Prospective employers seek Georgia 
Tech students who possess international experiences and skills. It is 
in the best interest of the United States economy for our education 
programs to produce citizens of the world who are comfortable with 
diverse cultures, languages, and ways of thinking and solving problems.

Q4.  In Mr. Wessel's oral testimony he said, ``As universities become 
more global, we are effectively, if unintentionally, increasing the 
capacity of firms and individuals abroad, to [do] jobs currently done 
here in the United States.'' Do you agree with this statement? If so, 
how do you weigh this cost to nation in your decision criteria? If not, 
why is he incorrect?

A4. Ideas and knowledge are now global. We have to be global to 
compete. The United States does not have a monopoly on brilliant ideas 
or intelligent people. International presence puts American 
universities on the front doorstep of the best talent and ideas in the 
world. International linkages expand access to ideas and generate 
opportunities for our faculty and students. While it is true that we 
are exposing others to our knowledge and ways of doing things, we are 
also creating capabilities for other societies to develop their own 
strengths and expertise, which allows them to tackle problems and 
create markets unique to their own societies. It also creates trading 
relationships and cultural understandings, which may help facilitate 
international stability. The grand challenges of today's world--clean 
air, clean water, enough food, enough energy--are so complex and 
important that they require expertise and collaborative effort from 
around the world.

Q5.  What specific steps have you taken to ensure that your U.S. STEM 
students are benefiting from your globalization efforts? How do you 
measure the benefits to your U.S. students?

A5. As one of the Nation's top ten public universities and its largest 
producer of engineers, we focus on educating graduates who understand 
technology in a global context. More than a third of our undergraduates 
study or work abroad. Seventeen of our undergraduate degree programs 
offer an International Designator. This means special courses and 
overseas experiences that add a global context to their field of study, 
and that fact is noted on their diploma. Our graduates are highly 
sought after by employers, and our alumni report that the international 
aspects of their education add value to their careers. In addition, by 
participating in international research collaborations, based both in 
Georgia and overseas, our faculty and students learn what the state-of-
the-art is and how research works in other countries and the private 
sector. This helps position U.S. researchers and companies to design 
effective global strategies. It is Georgia Tech's goal that all 
students, graduate and undergraduate, and across all disciplines will 
receive an education that would allow them to be globally competent 
upon graduation.

Q6.  Would the cost of delivering a degree abroad have implications for 
the number or caliber of foreign students who come to the U.S. for 
their education? Might that, in turn, affect the available talent pool 
within the U.S.?

A6. We believe that creating a global presence will improve access to 
the best and brightest foreign talent. While the global educational 
marketplace is increasingly competitive, Georgia Tech's activities in 
the U.S. and abroad raise awareness of the capabilities and value of 
Georgia Tech's research and education programs and the attractiveness 
of studying at Georgia Tech and in the U.S. High quality students will 
still want to come to study in the U.S. for the same reasons U.S. 
students will continue to want to go abroad--the recognition that the 
world is a global marketplace and understanding how to work in 
multinational situations is key to a successful technical education and 
career.

Q7.  You say that one of the benefits of being a transnational 
university is promoting cultural exchange and international 
understanding among your domestic students.

     How much interaction do your domestic students have with 
international scholars, both academics and students? What if you only 
consider branch campuses--how much interaction is there between 
American students and foreign students enrolled at branch campuses?

A7. Foreign students and scholars on the Georgia Tech campus in Atlanta 
participate fully in campus life. American students interact in 
classroom, laboratory, and social settings with foreign classmates, 
professors, exchange students, and visitors. The Office of 
International Education serves foreign students enrolling on the 
Atlanta campus. In addition to assisting with administrative matters 
such as visas, insurance, and registration, the office has been 
proactive in helping students become part of the campus community. They 
offer a number of programs, e.g., International Coffee Hour: Coffee, 
Culture and Conversation, a seven-week non-credit course in accent 
reduction to enable students to communicate more effectively, and 
volunteer opportunities in the Atlanta metropolitan area.
    More than a third of our undergraduates study or work abroad during 
the course of their education. At Georgia Tech's campus in France, 
foreign students interact with domestic students and scholars in a 
variety of ways both inside and outside the classroom. American and 
foreign students studying there work with professors from the Atlanta 
campus who have come to teach there temporarily and with faculty who 
live and work there full-time. Georgia Tech's campus in Lorraine has an 
active student government association and sports program open to all 
students.
    Foreign students who enroll in Georgia Tech's programs overseas 
include time on the Atlanta campus as part of their studies. For 
example, there are currently 165 students registered at Georgia Tech 
Lorraine with an additional 35 students from that campus completing 
their studies in Atlanta. Students enrolled in the dual Master's degree 
program in Global Logistics and Supply Chain Management offered by 
Georgia Tech and the National University of Singapore are required to 
spend two semesters enrolled on Georgia Tech's Atlanta campus.
    In addition to the sorts of face-to-face interaction described 
above, distance learning plays an increasingly important role in the 
delivery of course content in overseas collaborations. Students in 
campuses on more than one continent can be engaged in the same 
classroom activity through high-speed real-time connections.

Q8.  What's the motivation for considering a campus in Andhra Pradesh? 
What degree programs are being proposed? What do your U.S. students 
gain from an MS/Ph.D. program established there? How does your planned 
campus in India differ from your current campuses in Ireland, Singapore 
and France? Could you elaborate on your efforts in China?

A8. Despite what has been reported in the Indian press, Georgia Tech 
has not agreed to build a campus in Andhra Pradesh, India. What we have 
actually agreed to is non-binding discussions that could culminate in a 
potential research and graduate education platform in Andhra Pradesh. 
However, we have a list of significant conditions that must be met, and 
we will not go forward until all of those conditions are met in Andhra 
Pradesh. These conditions are closely tied to a few core principles. A 
potential opportunity must provide a strategic advantage for Georgia 
Tech, have a research-driven motive, and a clear educational benefit 
for our own students. It must operate within the parameters of the laws 
of the United States and Georgia as well as the host nation. The 
activities must also preserve the quality and integrity of Georgia 
Tech's reputation. Finally, we strive to operate all international 
operations in a self-supporting and revenue-neutral manner relative to 
our other operations. These principles must be fulfilled by all our 
overseas activities. Each overseas opportunity is assessed on a case-
by-case basis, and the structuring of each program is designed to take 
advantage of the unique capabilities of the country and partner 
institution.
    In China, Georgia Tech is partnering with Shanghai Jiao Tong 
University (SJTU), located in Shanghai, China. Since May 2006, selected 
Georgia Tech graduate courses have been taught at SJTU by Georgia Tech 
faculty, and SJTU students can pursue dual Master's degrees from both 
institutions. In addition, since May 2005, a Georgia Tech Shanghai 
Summer Program has been offered for undergraduate students from all 
over the United States. Georgia Tech faculty members teach regular 
Georgia Tech courses in engineering, humanities, and social sciences. 
Students also enroll in complimentary non-credit courses offered by 
SJTU in Chinese cooking, Chinese painting, Chinese calligraphy, martial 
arts, and Tai Chi.

Questions submitted by Representative Eddie Bernice Johnson

Q1.  What does it cost to deliver a degree in the U.S.? France? 
Singapore? China? India?

     If it is cheaper to get a degree in the home country, why would a 
student decide to go to the U.S. for the same degree?

A1. Costs to deliver a degree are difficult to quantify because they 
are affected by not only location, but also area of study, costs of 
supporting faculty expertise, infrastructure expenses, and many other 
factors. Each overseas activity is assessed on a case-by-case basis, 
and the structuring of each program is designed to take advantage of 
the unique capabilities of the country and partner institution. Tuition 
is established in a manner that reflects the total resources available 
to the campus and Georgia Tech's intent to operate all international 
operations in a self-supporting and revenue-neutral manner relative to 
our other operations.
    In general, foreign students choose to study in the U.S. for a 
variety of reasons, including access to unique expertise and facilities 
and the chance to experience a different culture. Georgia Tech 
continues to receive applications from very bright foreign students, 
and, in the end, high quality students will still want to come to study 
in the U.S. for the same reasons U.S. students will continue to want to 
go abroad--the recognition that the world is a global marketplace and 
understanding how to work in multinational situations is key to a 
successful technical education and career.

Q2.  Of the countries you single out as locations of existing Georgia 
Tech programs, France and Ireland are OECD members and Singapore 
occupies a special and advanced place on the continuum of economic 
development.

     Might different concerns surround undertakings in a country such 
as India that has not achieved such a high level of development, 
considering potential differences between that country and the U.S. in 
everything from salary levels to the significance of the indigenous 
research to which the U.S. institution would gain access?

A2. Each Georgia Tech overseas program is considered, evaluated, 
selected, and designed based on the unique opportunities and 
circumstances of the potential partner institution and country. There 
are certain core principles that are applied to all overseas 
activities, as outlined in my testimony to the Committee. However, the 
way in which each partnership contributes to the core principles, 
including assisting Georgia Tech in meeting its mission of defining the 
technological research university of the 21st century and educating the 
leaders of a technologically driven world, varies widely. The world is 
getting progressively ``smaller,'' and Georgia Tech graduates and 
researchers will have responsibilities and opportunities throughout the 
globe. The value of and need for partnerships by U.S. universities with 
a variety of institutions in a variety of countries at a variety of 
stages of development should be defined broadly, and the implications 
of such partnerships should be explored thoroughly.
                   Answers to Post-Hearing Questions
Responses by Mark G. Wessel, Dean, H. John Heinz III School of Public 
        Policy and Management, Carnegie Mellon University

Questions submitted by Chairman Bart Gordon

Q1.  How do STEM programs offered at foreign campuses affect the 
offshoring of STEM jobs? Are we exporting one of the principal sources 
of our comparative advantage? What policy changes need to be made to 
ensure that the globalization of universities is in the national 
interest?

A1. Because there are competing forces around this issue it is a 
complicated question deserving of some empirical analysis. Given that 
caveat, though, my guess is that in the short run it is almost 
certainly true that as the quality of tertiary education improves in 
foreign countries foreign citizens gaining that training compete for 
jobs globally, some of which might otherwise have been done by U.S. 
workers. The long run issue is, of course, whether the increased 
efficiency generated by having work done by its lowest cost provider 
frees resources for use on higher value-added activities that will 
increase wealth in the United States. I believe it does and will. Many 
U.S. firms, in out-sourcing software development have become more 
focused on innovations around their core business whether those are 
manufacturing or IT enabled services. Ultimately, this is the dynamic 
source of progress markets offer societies.
    I also think it important to note that our citizens absolutely have 
to come to a better sense of the way in which their professional lives 
and the value they create in society will change fundamentally as a 
result of globalization. If we do not ``globalize'' their education 
(and this means something fundamentally different than just providing 
some new curriculum in our old ways) it will be the greatest abdication 
of our responsibility to U.S. society in the history of American 
universities. That of course is an opinion and probably an extreme one 
relative to my colleagues. But I hold it firmly. Indeed, I extend this 
view to research as well although I admit that case is harder to make 
on evidentiary grounds. We know the people that employ are graduates at 
every level increasingly demand professionals with global skills and 
experience.
    There are two or three primary policy initiatives required to take 
advantage of this dynamic process. We must be much better as a society 
at providing resources to those most directly negatively affected by 
the dislocations open trade in services can generate. The ``winners'' 
must compensate the ``losers'' in this process or the society will not 
be able to generate sufficient consensus to sustain the discipline of 
competition. We are notoriously bad as a society at this important 
process and it will only become more important in the future. This 
process WILL occur whether universities globalize or not.
    It is self-serving, of course, but the other essential policy 
initiative is to continue and even increase investment in our 
educational system. While the tertiary system is important, relatively 
speaking we arguably have more work to do at the primary and secondary 
levels to create both the ability and predisposition for young 
Americans to pursue science and technology professions. Only by 
increasing our expectations with respect to the educational outcomes of 
our population as a whole (and our system leaves behind many) can we 
create and take advantage of the opportunities opened by innovation.

Q2.  Has (the) decline (in public sector support for universities) 
affected the way universities view their relationship to the society 
that those public-sector subsidizers represent? Who do today's 
universities regard as their stakeholders?

A2. Another very provocative question! It's hard to imagine that it 
hasn't although my sense is that so far this has occurred at the margin 
rather than the core of our activities. And some of that change is 
actually positive (although some not). And some of that change may have 
occurred with or without the changes noted in support.
    One indicator of this change is the relative size and frequency of 
fund-raising campaigns run by major universities. A $1 billion campaign 
was huge a very few years ago. We seemingly blew through $2, $3, and $4 
billion as the normative goal without batting an eye.
    Again, although the data needs to be analyzed, my guess is that 
over the last few decades we would also observe a significant increase 
in the proportion of almost any major university's resources spent on 
lobbying both state and federal representatives. This is a reflection, 
I believe, of the increased relative scarcity of non-politicized 
funding (e.g., the National Science Foundation) and the consequent 
effort to substitute politicized funding (e.g., earmarks).
    Finally, of course, universities have become far cleverer at 
estimating elasticities of demand for their educational programs and 
pushing price to its optimal net revenue point. This is a very 
controversial development, I realize. It is not clear, though, that 
society is worse off as a result of this in that it tends to direct 
student support to the neediest segments of our population.
    With a lesser degree of generality, many universities have focused 
more on building closer ties with corporate customers or expanding 
their suites of professional Master's programs as revenue generating 
activity.
    And it is clearly the hope for the globalization process that it 
will generate net resources for any university engaged in the process.
    In aggregate does this shifting constituency base for universities 
mean they are less connected to the goals of their society as a whole? 
Although it is a worthy question and there are clear examples of where 
this has happened (I think of the very few but notorious cases where 
funding from drug companies has influenced research on the effects of 
new drugs), my strong sense is that our connection to the fundamental 
social interest has not decayed. The core output at our great 
universities is the generating of new knowledge through research and 
the transfer of that knowledge to our graduates. My sense is that the 
barriers between the demands of funders and the research and education 
decisions that occur at universities are still very much intact and 
effective. But I equally would not be surprised to see erosion around 
the margin as research and education become more directed to the needs 
and aspirations of particular constituencies most able to fund them. 
While a certain amount of this is probably constructive, we must at all 
costs be on guard against this proceeding ``too far'' and I do worry 
that in the increasingly intense battle for resources this is a danger. 
I should note that there are increasing demands from the political 
constituency which are as much threat to the comparative advantage our 
universities generate as they are protective of that advantage.
    Finally, I will repeat that I believe our society has a fundamental 
interest in its citizens being more globally capable and that the 
globalization of American universities is absolutely essential to 
achieve that goal.

Q3.  Sloan Foundation President Ralph Gomory has pointed out that one 
of globalization's effects has been to drive a wedge between the 
fundamental interests of multinational corporations and those of the 
national economies in which they are based. Is the drive to efficiency 
described (in your testimony) likely to lead to a similar split between 
major universities and their home societies?

A3. I don't think so but it is another question worth evaluation. My 
argument would be that the highest socially value-added activity of 
major research universities has been to generate new knowledge. This is 
why we have been funded. Educating students has been a way to transfer 
that knowledge to society effectively and in doing so achieve other 
social goals of equality of opportunity (and maybe even the 
psychological and social maturation of our population). A core feature 
of basic science is that while the costs of generating it are very, 
very high--the marginal cost of its distribution is relatively low and 
decreasing as technology is rapidly changing. Thus, achieving scale in 
the distribution process (globalization) will not reduce the basic 
science available to our society--although it does decrease our 
``monopoly'' control over that science. Moreover, although most 
universities have not figured out how to take advantage of it, the 
prospect exists that globalization will decrease the cost of generating 
new knowledge. Again, the solution to the problems this could generate 
is not to attempt to control the dissemination of knowledge to 
humankind. It is, rather, to continue apace the good work of this 
committee to support new students entering STEM fields so that our 
comparative advantage might rest in finding the economic and social 
applications of this new science with the highest value to our nation 
and species.

Q4.  What specific steps have you taken to ensure that your U.S. STEM 
students are benefiting from your globalization efforts? How do you 
measure the benefits to your U.S. students?

A4. At levels of specificity I am only competent to speak for the Heinz 
College at Carnegie Mellon and not for the university as a whole. While 
our evaluation of global activities is broader than this there are 
three critical questions we ask ourselves. First, will the activity 
generate net resources that can support the ``home'' campus, its 
students and faculty. We try to make that analysis comprehensive and 
include both faculty and managerial time as well as the indirect costs 
of the activities. But it is a difficult measurement. Nevertheless, I 
believe that my college will have more faculty on site in Pittsburgh in 
the next five years as a result of the resources provided by these 
efforts than it would have otherwise and that our student/faculty ratio 
will be lower on-site. Not a perfect indicator of benefit but not a bad 
one.
    Second, to date we have always found ``partners'' to work with 
abroad and one of our criteria in selecting both the partners 
themselves and the structure of our activities is whether it holds the 
potential to generate new knowledge or curriculum that can be imported 
back into our broader environment. So, as one example, we have an IT 
program that trains General Motors employees globally. As a result of 
that connection and the needs of our partner, we have been pushed to 
develop and deploy expertise in managing the global sourcing of IT 
enterprises. These classes have been imported back into our traditional 
curriculum, making our students in Pittsburgh better trained. It has 
also led to data collection and project based activities that have 
stimulated new research areas--not because GM wanted this research but 
because our faculty became stimulated by the interactions. We have 
tried to replicate this model in our other partnerships as well with 
some good success. These partners offer us the indirect benefit of 
helping expand our reputations and thereby help our students find new 
career opportunities.
    Finally, we have invested significant resources in technology that 
allows us to integrate our activities across our global sites. Classes 
are now easily transmitted back and forth allowing students at all 
sites access to faculty and courses than none independently could 
replicate in full. Further, it allows connections between researchers 
across these sites that stimulate collaboration.
    Measurement is a difficult task. Obviously the above implies a 
financial measure, measures of content exchange across physical space 
(e.g., transmission of courses) and measures based around research 
projects and curriculum development. None of these are easy and, 
frankly, we probably aren't doing as good a job as we might in being 
systematic about assessing this data.

Questions submitted by Representative Eddie Bernice Johnson

Q1.  What does it cost to deliver a degree in the U.S.? France? 
Singapore? China? India? If it is cheaper to get a degree in their home 
country, why would a student decide to go to the U.S. for the same 
degree? Might this have implications for the number or caliber of 
foreign students who come to the U.S. for their education? Might that, 
in turn, effect the available talent pool within the U.S.?

A1. If your question is truly ``what does it cost'' I don't know with 
certainty and it depends on how you offer it. Fixed costs of starting 
up somewhere else are very high and in our experience require 
substantial subsidy from external partners. Marginal costs are likely 
to decline over time as we achieve scale in those other environments. 
There are lots of subtleties, though. For example, faculty in Australia 
are paid less than faculty in the U.S. However, other ``costs of doing 
business'' there are significantly higher. And ``exporting'' U.S. 
faculty to another location is extremely expensive.
    If your question is ``what do we charge'' the answer at Carnegie 
Mellon is we charge the same for a degree anywhere in the world--at 
least to a first order approximation. Sometimes our partners will 
subsidize certain target audiences in paying that price but our price 
remains the same. I suspect this is the case for most major 
universities although I do not know this. However, there are pressures 
in these markets which could change this over time--although 
universities will resist that both on principle and because it poses 
difficult practical problems in markets.
    There are three primary reasons international students come to the 
U.S. for their education. Elites from other countries come for 
knowledge and prestige. The majority of international students come for 
knowledge and for access to the U.S. labor market. This latter 
motivation is even more intense at the graduate level than the 
undergraduate level. The emergence of high quality tertiary education 
institutions abroad (which is happening quite independent of U.S. 
university efforts to globalize) will reduce the cost of education and 
begin to shift the cost-benefit analysis. What the net effect of that 
will be in terms of our supply of skilled labor from abroad will depend 
on U.S. universities' ability to maintain their edge in the creation 
and delivery of knowledge, the dynamism of the U.S. economy and the 
opportunities it creates, and very importantly whether we tackle the 
important policy problems around immigration in a more constructive way 
than we have so far.
                   Answers to Post-Hearing Questions
Responses by Philip G. Altbach, Director, The Center for International 
        Higher Education; J. Donald Monan SJ Professor of Higher 
        Education, Boston College

Questions submitted by Chairman Bart Gordon

Q1.  How do STEM programs offered at foreign campuses affect the 
offshoring of STEM jobs? Are we exporting one of the principal sources 
of our comparative advantage? What policy changes need to be made to 
ensure that the globalization of universities is in the national 
interest?

A1. Inevitably, as foreign academic systems develop and grow more 
sophisticated and improve their quality, bright students who might have 
chosen to come to the U.S. may choose to stay at home in China or 
elsewhere. This will expand the number of well-qualified S and T 
personnel abroad and may increase jobs in these fields outside of the 
U.S. This does not necessarily mean that there will be fewer such jobs 
in the U.S. but only the that the entire S and T field will be more 
diversified worldwide--the U.S. can grow along with others.
    What can the U.S. do about this situation? The answer is easy--we 
can, and must, keep the quality of our universities high and ensure 
that we are providing ``world class'' preparation in S and T fields. 
This will mean that qualified foreigners will continue to choose to 
study in the U.S., and some will choose to remain after completing 
their degrees. It will also mean that Americans can get a world class 
education in S and T in this country and more will be lured to these 
top universities.

Q2.  In Mr. Wessel's written testimony, he notes that ``the degree to 
which the public sector is willing to provide subsidy for 
[universities'] activity has declined--at least relative to the overall 
cost of providing. . .research and education output.'' Has this decline 
affected the way universities view their relationship to the society 
that those public-sector subsidizers represent? Who do today's 
universities regard as their stakeholders?

A2. Cutbacks in state funding to higher education and especially to the 
public research universities has affected how academe looks at society 
and government. More and more, universities are forced to look out for 
the ``bottom line'' and this is often at the expense of basic research 
and top quality S and T training. Universities are forced to do short-
term research for the private sector. While such research is often 
useful, it cannot be at the expense of basic training of doctoral 
students or producing basic research that leads to longer term 
discoveries--as well as Nobel Prizes.
    One public university president once said--``at one time we were a 
state university, then we became a state supported university, and now 
we are a state located university''--meaning that the university had to 
generate its own funds, through high tuition, selling products and 
services, and the like. This is not good for science.

Q3.  Asserting that ``there are too many universities in this 
country,'' Mr. Wessel stated in his prepared testimony that ``the 
emergence of new markets abroad. . .offer[s] opportunities to take 
advantage of inherent economies of scale without jeopardizing the 
branding and selection fundamentals of our business model at home. 
Thus, for many of us, going global is simply efficient.'' Sloan 
Foundation President Ralph Gomory has pointed out that one of 
globalization's effects has been to drive a wedge between the 
fundamental interests of multinational corporations and those of the 
national economies in which they are based. Is the drive for efficiency 
described likely to lead to a similar split between major universities 
and their home societies?

A3. I do not believe that there are too many universities in the U.S. 
Our research universities are quintessential ``public good'' 
institutions. American society needs to support these institutions to 
perform their essential missions of teaching and research, and to some 
extent service. If we do this, the activities of multinational 
corporations will not affect higher education in a basic way. It is 
simple--we need to keep aware of the basic mission of our research 
universities. These universities are not servants of multinational 
corporations but rather teaching and research institutions that deserve 
public funding and support. We cannot leave this support to the private 
sector, especially in a globalized economy!

Q4.  What are the primary drivers of university globalization? How do 
universities factor in America's national interest when determining 
whether and how to globalize?

A4. Universities are moved toward globalization by trends in science 
and scholarship, and to a small extent by the need to enroll foreign 
students to earn money. Universities also internationalize in an effort 
to provide an international perspective for American students. One can 
look at Australia to see how an excellent university system has been 
forced to recruit overseas students and establish branch campuses just 
to make money because of government cutbacks. So far, American 
internationalization has been mainly for sound academic reasons, 
especially at the top colleges and universities. Because the U.S. has 
no clearly articulated national higher education policy in the 
international, or for that matter, in other areas, U.S. universities 
have no sense of what is in the national interest really.

Q5.  In your opinion, what are the potential risks that American 
universities face in establishing international campuses, and are they 
adequately considering these risks? What types of data and information 
do you believe universities need to make an informed decision?

A5. Relatively few U.S. universities have established overseas campuses 
so far, although the number is growing. Universities need to look at 
the big picture of what establishing campuses will do to their domestic 
mission, whether such campuses can be sustained over time, and they 
need to ensure that they are maintaining high academic standards 
overseas. I do not believe that many are doing their ``due diligence'' 
when considering overseas expansion.

Q6.  What is the extent of the globalization of U.S. universities now? 
How extensive will it become? What are the barriers to the 
internationalization of U.S. universities?

A6. This question would require a long and complex answer. My own 
opinion is that U.S. universities are not much globalized--we send only 
modest numbers of students overseas for international study, we have 
limited relationships with foreign universities and so on. There are 
some leaders in internationalization, but by and large the system is 
fairly insular. A key barrier is, of course, funding. The Lincoln 
scholarship program would help a lot, as would greater attention at the 
State level to internationalization--essentially no U.S. state really 
has an active agenda in this field.






















  THE GLOBALIZATION OF R&D AND INNOVATION, PART III: HOW DO COMPANIES 
                 CHOOSE WHERE TO BUILD R&D FACILITIES?

                              ----------                              


                       Thursday, October 4, 2007

                  House of Representatives,
         Subcommittee on Technology and Innovation,
                       Committee on Science and Technology,
                                                   Washington, D.C.

    The Subcommittee met, pursuant to call, at 10:08 a.m. in 
Room 2318 of the Rayburn House Office Building, Hon. David Wu 
[Chairman of the Subcommittee] presiding.



                            hearing charter

               SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION

                  COMMITTEE ON SCIENCE AND TECHNOLOGY

                     U.S. HOUSE OF REPRESENTATIVES

                      The Globalization of R&D and

                         Innovation, Part III:

                    How Do Companies Choose Where to

                         Build R&D Facilities?

                       thursday, october 4, 2007
                         10:00 a.m.-12:00 p.m.
                   2318 rayburn house office building

1. Purpose

    On Thursday, October 4, 2007, the Subcommittee on Technology and 
Innovation of the Committee on Science and Technology will hold a 
hearing to consider the factors companies use to locate their research 
& development (R&D) and science, technology, and engineering intensive 
facilities. Witnesses will discuss the policies other countries use to 
attract such facilities, and how to make the U.S. more attractive to 
companies. Firms now have many options around the globe when deciding 
where to locate R&D, design, and production facilities. This hearing--
the third in a series of hearings examining the impact of globalization 
on innovation--will explore the trends in, and factors for, site 
selections for science, technology, and engineering intensive 
facilities and the policies needed to ensure that the U.S. remains 
attractive for these investments.

2. Witnesses

Dr. Martin Kenney is Professor of Human and Community Development at 
University of California, Davis, and Senior Project Director at the 
Berkeley Roundtable on the International Economy, University of 
California, Berkeley.

Mr. Mark M. Sweeney is senior principal in McCallum Sweeney Consulting, 
a site selection consulting firm.

Dr. Robert D. Atkinson is President of the Information Technology and 
Innovation Foundation (ITIF).

Mr. Steve Morris is the Executive Director of the Open Technology 
Business Center (OTBC).

Dr. Jerry Thursby is Ernest Scheller, Jr. Chair in Innovation, 
Entrepreneurship, and Commercialization at Georgia Institute of 
Technology.

3. Brief Overview

          Firms weigh many factors when deciding where to site 
        R&D and science, technology, and engineering intensive 
        facilities including market access, costs, intellectual 
        property regimes, customizing products for the local market, 
        proximity to university labs, co-location with production 
        facilities, quality of R&D personnel, and tax and other 
        incentives provided by the host locality.

          Other countries, industrialized and developing, are 
        courting high-technology facilities to spur innovation, job 
        creation, and economic growth. Offshoring began with lower-
        skill, labor-intensive tasks, such as call centers, but the 
        practice is moving up the value chain to include R&D and other 
        science, technology, and engineering intensive facilities. And 
        low-cost countries, like India and China, are using targeted 
        industrial policies to attract an increasing share of high-
        technology facilities and jobs.\1\
---------------------------------------------------------------------------
    \1\ See, for example, ``China Rushes Upmarket: In the face of 
scandals, Beijing shifts incentives to higher quality exports,'' 
BusinessWeek, September 17, 2007.

          Many analysts believe that America's comparative 
        advantage is derived in large part from its ability to stay on 
        the cutting edge of innovation and R&D. They argue that 
        maintaining technological leadership has become even more 
        important as an increasing scope of jobs become offshorable to 
---------------------------------------------------------------------------
        low cost countries.

          Trends in R&D site selection are not well tracked but 
        recent announcements show that many facilities are being placed 
        outside the U.S. According to Site Selection magazine, 22 of 
        the 25 largest facility investments in semiconductor plants 
        since January 2006 have occurred in Asia, including nine of the 
        top 10.

4. Issues and Concerns

What are the trends in site selections for R&D facilities? Is the U.S. 
continuing to get its proportionate share of new R&D investments? 
Trends in R&D site selection are not well tracked but recent 
announcements show that many are being placed outside the U.S. For 
example, Applied Materials announced the opening of a major R&D complex 
in China in March 2007. According to Site Selection magazine, 22 of the 
25 largest facility investments in semiconductor plants since January 
2006 have occurred in Asia, including nine of the top 10. A University 
of Texas study recently found that of the 57 major global telecom R&D 
announcements in the past year, more than sixty percent (35) were 
located in Asia, whereas, a meager nine percent (5) were located in the 
U.S.
    An OECD study found that China recently passed Japan as the number 
two R&D performing country. China's ascent has been very rapid and is 
driven in part by multinational corporation investments in R&D. The 
National Science Foundation found that, as of 2002, there are net 
inflows of R&D into the U.S. by multinational firms. The largest 
surplus is with Europe, where European-based multinationals spent $20.7 
billion to perform R&D in the U.S., whereas, American-based 
multinationals only spent $12.6 billion to perform R&D in Europe.

What factors do site selection managers consider when locating R&D, 
design, and production facilities? Studies show that many factors are 
weighed by firms when deciding to site an R&D facility including market 
access, costs, intellectual property regimes, customizing products for 
the local market, proximity to university labs, co-location with 
production facilities, and quality of R&D personnel. The importance of 
each factor varies across industries--e.g., site selection for 
pharmaceutical drug discovery is different from semiconductor R&D. Some 
analysts also believe there is an emerging division of labor where work 
on incremental improvements to existing products is done in lower-cost 
countries, but work on new products stays in developed countries.
    A recent study by Drs. Jerry and Marie Thursby found that labor 
costs were not the main reason for locating R&D; market factors, 
proximity to universities, and quality of R&D personnel were all at 
least important. Other analysts have pointed out that labor costs are 
the critical differentiator between countries since high quality 
personnel is a prerequisite for any R&D facility. Low-cost countries, 
like India and China, are rapidly building the capacity and quality of 
their R&D and research universities. As a result, those analysts expect 
that low-cost countries will capture an increasing proportion of R&D 
and engineering services.

What role do government policies play in site selection? How do tax 
relief, training support, intellectual property laws, and other 
policies affect site decision-making? Countries use a variety of 
incentives to attract and retain STEM intensive investments, including 
special economic zones, tax holidays, and in some cases requiring it 
for market access. As low cost countries are targeting more innovation, 
tax holidays have played a critical role in spurring information 
technology investments, especially in countries such as India. As low-
cost countries move higher up the value chain, other developed 
countries are offering even greater incentives to attract and retain 
R&D investments.

What strategies can local governments use to make their cities and 
counties more attractive to companies looking for facility locations? 
Cities, states, and counties are sometimes able to provide financial 
incentives to companies interested in locating facilities in their 
area. However, due to limited budgets, many local economic development 
agencies must rely on more creative strategies for attracting 
companies. Local governments often tout proximity to complementary 
markets, highly skilled local populations, affordable housing, low 
state taxes, or other features companies might find favorable. However, 
as competition increases with international locations, local 
governments must be more proactive in demonstrating the suitability of 
their states, towns, and counties to companies.
    Chairman Wu. Good morning. The hearing will now come to 
order.
    I want to thank everyone for attending today's hearing on 
The Globalization of Research and Development and Innovation, 
Part III: How Do Companies Choose Where to Build R&D 
Facilities?
    This is a third in the Science and Technology Committee's 
series of hearings on the topic and the first to explore the 
phenomenon from the point of view of businesses looking for the 
optimal location for R&D facilities. More importantly, and most 
relevant to this committee, we are interested in hearing what 
our country can do to attract business R&D facilities and keep 
them here in the United States.
    The Science and Technology Committee just led the Congress 
in passing the America COMPETES Act, which strengthened R&D in 
education programs that will make our country more innovative 
and our students more successful in science, math, and 
engineering.
    As we will hear from our witnesses today, competitiveness, 
especially on the regional level, depends on far more than a 
well-prepared technical workforce and first-class R&D 
facilities. For a business looking to locate an R&D facility, 
other factors matter also, like access to transportation, 
favorable government policies, good local universities, and 
employee necessities, such as affordable housing and access to 
quality health care.
    In 1993, the Oregon legislature created the Strategic 
Investment Program, or SIP. The goal was to attract high tech 
companies to Oregon, specifically the semiconductor industry. 
The program allows for a 15-year property tax abatement, among 
other factors. Most importantly, the program is administered by 
local government, so that they can use it as they please. 
Washington County, in my Congressional district, has actively 
used this to attract companies. Intel, Sun Microsystems, 
Genentech, and a number of other high tech companies have 
located facilities in the region, providing quality jobs to 
local communities.
    SIP is not the only factor that makes Oregon competitive 
for recruiting high tech firms, but it is one example of a 
government policy designed to attract companies to stay in the 
United States. To understand the challenges facing our country, 
we need a better understanding of who we are competing against 
for R&D facilities.
    While trends in R&D site selection are not well tracked, 
recent announcements show that many R&D facilities are being 
placed outside the United States. According to Site Selection 
Magazine, 22 of the 25 largest facility investments in 
semiconductor plants since January of 2006 have occurred in 
Asia, including nine of the top ten. While this is not a 
complete one-on-one track with R&D, R&D frequently follows such 
investments, and vice versa. Of course, we need far more data 
and information to truly quantify the extent to which companies 
are building facilities overseas, and even more information to 
understand why.
    Some of our witnesses today will discuss the extent to 
which low cost countries have been able to attract the 
offshoring of high tech work. Because this is an emerging 
challenge, there are differing viewpoints on the scale of the 
globalization of R&D and innovation. I am sure we will have a 
lively debate on this topic, which will hopefully give us a 
better background on the competition among countries and 
regions.
    Two of our witnesses come from the practitioner end of the 
site selection field, and will be able to address more of the 
why. I am interesting in hearing both how companies make 
decisions on where to locate, and what we can do to entice them 
to locate in America, because America would be better off if we 
could find ways to maximize a company's economic success while 
creating good jobs here in the United States. It is my home 
that we will be able to strike this balance between the 
interests of multinationals, and creating jobs and R&D 
facilities here in the United States.
    The Chair now recognizes Dr. Gingrey, our Ranking Member of 
this subcommittee, for his opening statement.
    [The prepared statement of Chairman Wu follows:]
                Prepared Statement of Chairman David Wu
    I want to thank everyone for attending today's hearing on The 
Globalization of R&D and Innovation, Part III: How do Companies Choose 
Where to Build R&D Facilities? This is the third in the S&T Committee's 
series of hearings on the topic of the globalization of R&D, and the 
first to explore the phenomenon from the point of view of businesses 
looking for the optimal location for the R&D facilities.
    On the flip side, and most relevant to this committee, we are also 
interested in hearing what we can do to make sure that our states and 
our country can do to attract those businesses.
    The Science and Technology Committee just led the Congress in 
passing the America COMPETES Act, which strengthened R&D and education 
programs that will help make our country more innovative and our 
students more successful in science, math, and engineering.
    But as we'll hear from our witnesses today, competitiveness, 
especially on the regional level, depends on far more than a well-
prepared technical workforce and first class R&D facilities. Don't get 
me wrong: those are the basis for our country's economic success.
    But for a business looking to locate an R&D facility, other factors 
matter too: like access to transportation, favorable government 
policies, local universities, and worker amenities like affordable 
housing and access to quality health care.
    In 1993, the Oregon legislature created the Strategic Investment 
Program. The goal was to attract hi-tech companies to Oregon, 
specifically the semiconductor industry. The program allows for a 15-
year property tax abatement.
    Most importantly, the program is administered by local governments, 
so they can utilize it as they please. Washington County in my district 
has actively used this to attract companies. Intel, Sun Microsystems, 
Genentech, and a number of other high-tech companies have located 
facilities in Oregon, providing quality jobs to local communities. SIP 
is not the only factor that makes Oregon competitive for recruiting 
high-tech firms, but it is one example of a government policy designed 
to attract companies to stay in the U.S.
    To understand the challenges facing our country, we need a better 
understanding of who we're competing against for R&D facilities. While 
trends in R&D site selection are not well tracked, recent announcements 
show that many R&D facilities are being placed outside the U.S.
    According to Site Selection magazine, 22 of the 25 largest facility 
investments in semiconductor plants since January 2006, have occurred 
in Asia, including nine of the top ten. Of course, we need far more 
data and information to truly quantify the extent to which companies 
are building facilities overseas, and even far more information to 
understand why.
    Some of our witnesses today will discuss the extent to which low 
cost countries have been able to attract the offshoring of high-tech 
work. Because this is an emerging challenge, there are differing 
viewpoints on the scale of the globalization of R&D and innovation.
    I am sure we will have a lively debate on this topic which will 
hopefully give us a better background on the competition among 
countries and regions.
    Two of our witnesses come from the practitioner end of the site 
selection field, and will be able to address more of the ``why.''
    I am interested to hear both how companies make decisions on where 
to locate, and what we can do to entice them to locate here in the U.S. 
Obviously the main motivation of any company is to make a profit, and 
there's nothing wrong with that.
    But everyone would be better off if we could find ways to maximize 
a company's economic success while creating good jobs here in the U.S. 
It is my hope that this hearing helps us strike that balance.

    Mr. Gingrey. Mr. Chairman, thank you for holding these 
hearings, as you said, the third in our series, and certainly, 
on an incredibly important issue, the location of research and 
development, science, technology, and engineering intensive 
facilities of private companies.
    In the technology-based economy of the twenty-first 
century, it is vital that we enact policies that continue to 
make the United States a viable and attractive option for 
companies when they decide where they will place these 
essential facilities. Our panel this morning will provide us 
with a wealth of information on this issue, both from academia 
and the private sector. It will help us shape future policies 
that will inevitably affect our economy for generations to 
come. I want to thank each of the witnesses for being here 
today, and I am looking forward to hearing each of you.
    For companies, there are a multitude of factors that are 
considered when choosing to locate R&D facilities, whether that 
location is in the United States or elsewhere in the world. Our 
country is seen as being on the cutting edge of R&D, yet we 
continue to see the emergence of companies choosing offshore 
locations as an alternative to the United States.
    Other countries are using the United States as a model for 
economic prosperity, through attracting investment in available 
resources, including human capital. These countries have 
invested in their own intellectual infrastructure, by placing 
an extra emphasis on science and engineering, to the point 
where a large percentage of graduates are in these fields. 
According to a recent study, 50 percent of students in China 
receive their undergraduate degrees in natural science or 
engineering. In Singapore, that number is 67 percent, and 38 
percent of South Korea graduates fall into these fields.
    Unfortunately, the United States is lagging behind, with a 
staggering 15 percent of graduates in natural science or 
engineering. So I am glad that the work of this committee, 
through the America COMPETES Act, begins to address this 
shortcoming. We still have a large gap, of course, to close in 
this area.
    Furthermore, we have seen that China has made some of the 
most aggressive steps in advancing R&D, while we have chosen to 
place our fellow priorities elsewhere. China has founded the 
China Science Foundation that is modeled after the United 
States, and China is increasing its investment in science. R&D 
activities rose 500 percent in China between 1991 and 2002, 
from $14 billion to $54 billion, while during that same period, 
domestic R&D spending only increased by 140 percent, from $177 
billion to $244 billion.
    Mr. Chairman, if imitation is the sincerest form of 
flattery, we should be very flattered when it comes to R&D. 
Unfortunately, all of this flattery has had a profoundly 
negative effect for our economy. For example, according to Site 
Selection Magazine, 22 of the 25 largest facility investments 
in semiconductor plants, the Chairman has mentioned that, since 
January of 2006, occurred in Asia, including nine of the top 
ten. These are jobs that very easily could be held by hard-
working Americans and stimulating our domestic economy. 
Instead, we are watching these jobs go overseas, and the United 
States falls further behind in an area of such importance to 
the future of our Nation.
    The United States has historically been a leader in high 
tech, cutting edge innovation. Through a combination of 
increased domestic STEM education, which this committee has 
worked so diligently on, facilitation of domestic investment 
R&D, and collaboration on R&D policy, the United States can 
reclaim this leadership role.
    So, I await the testimony of our witnesses on how we can 
address these critical issues facing our committee. And with 
that, Mr. Chairman, I yield back.
    [The prepared statement of Mr. Gingrey follows:]
           Prepared Statement of Representative Phil Gingrey
    Mr. Chairman, thank you for holding this hearing--the third in this 
series--on the incredibly important issue of the locations of research 
& development, science, technology, and engineering intensive 
facilities of private companies. In the technology-based economy of the 
21st Century, it is vital that we enact policies that continue to make 
the United States a viable and attractive option for companies when 
they decide where they place these essential facilities. Our panel this 
morning will provide us with a wealth of information on this issue--
both from academia and the private sector--to help us shape future 
policies that will inevitably affect our economy for generations to 
come. I want to thank each of the witnesses for being here, and I am 
looking forward to hearing from you.
    For companies, there are a multitude of factors that are considered 
when choosing to locate R&D facilities, whether that location is in the 
United States or elsewhere in the world. Our country is seen as being 
on the cutting edge of R&D, yet we continue to see the emergence of 
companies choosing offshore locations as an alternative to the United 
States.
    Other countries have used the U.S. as a model for economic 
prosperity through attracting investment in available resources, 
including human capital. These countries have invested in their own 
intellectual infrastructure by placing an extra emphasis on science and 
engineering to the point where a large percentage of graduates are in 
these fields.
    According to a recent study, 50 percent of students in China 
receive their undergraduate degrees in natural science or engineering; 
in Singapore, that number is 67 percent, and 38 percent of South 
Korea's graduates fall into these fields. Unfortunately, the United 
States is lagging behind with a staggering 15 percent of graduates in 
natural science or engineering. I am glad that the work of this 
committee, through the America COMPETES Act, begins to address this 
shortcoming, but we still have a large gap to close in this area.
    Furthermore, we have seen that China has made some of the most 
aggressive steps in advancing R&D while we have chosen to place our 
federal priorities elsewhere. China has founded the Chinese Science 
Foundation that is modeled after the United States, and China is 
increasing its investment in science. R&D activities rose 500 percent 
in China between 1991 and 2002, from $14 billion to $54 billion; while, 
during that same period, domestic R&D spending only increased by 140 
percent from $177 billion to $245 billion.
    Additionally, countries have also mimicked our technology transfer 
programs. A number of companies that locate their facilities abroad 
place them near universities so that they can work in collaboration 
with those laboratories. Many companies report that overseas 
universities are more cooperative than their U.S. counterparts and much 
more willing to seek common ground on intellectual properties rights. 
At the same time, companies are finding current Bayh-Dole laws overly 
burdensome on facilitating domestic investment.
    Unfortunately, we have seen that a company can move its operation 
abroad in a short time period and end up with a much more generous 
contract. As we move forward, this committee must address these 
problems and find ways to provide the proper incentives for R&D 
investment to remain in the United States.
    Mr. Chairman, if imitation is the sincerest form of flattery, we 
should be very flattered when it comes to R&D. Unfortunately, all of 
this flattery has had a profoundly negative affect for our economy. For 
example, according to Site Selection magazine, 22 of the 25 largest 
facility investments in semiconductor plants since January 2006 
occurred in Asia, including nine of the top ten. These are jobs that 
very easily could be held by hard-working Americans and stimulating the 
domestic economy. Instead, we are watching these jobs go overseas and 
United States fall behind in an area of such importance to the future 
of our nation.
    The United States has historically been a leader in high-tech, 
cutting edge innovation. Through a combination of increased domestic 
STEM education, facilitation of domestic investment in R&D and 
collaboration on R&D policy, the U.S. can reclaim its leadership role. 
I await the testimony of our witnesses on how we can address these 
critical issues facing our committee. With that Mr. Chairman, I yield 
back.

    Chairman Wu. Thank you, Dr. Gingrey.
    If there are other Members who wish to submit opening 
statements, your statements will be added to the record at this 
point.
    [The prepared statement of Mr. Mitchell follows:]
         Prepared Statement of Representative Harry E. Mitchell
    Thank you, Mr. Chairman.
    Today's hearing raises important questions about the impact of 
globalization on the technical job market in the United States.
    As the economies of the world become more intertwined, we need to 
ensure that America's participation in the global economy does not 
lower the standard of living for American workers.
    While there is a consensus that the number of jobs available will 
not change, it is essential that we understand how globalization may 
impact the type of jobs available. This means that we must continue to 
educate workers with the necessary skills to perform STEM jobs.
    Offshoring is increasing at a rapid rate in certain industries and 
is this trend is expected to continue. It is our job as lawmakers to 
carefully assess the current situation and hear from experts in the 
field to consider what our future actions should be.
    I look forward to today's testimony, and I yield back the balance 
of my time.

    [The prepared statement of Ms. Richardson follows:]
         Prepared Statement of Representative Laura Richardson
    Thank you Chairman Wu, for holding this important hearing today. As 
the newest Member to this committee, I have been very impressed thus 
far, by the apparent bipartisan manner in which this committee 
operates. From the USFA reauthorization hearing that we held this past 
Tuesday, to the hearing that we held last week on inter-operability in 
Health Information Technology, it is obvious to me that this 
subcommittee, and the Full Science & Technology Committee is dedicated 
to ensuring that our country remains competitive, and a leader in the 
fields of Science, Technology, Engineering, & Math (STEM).
    Along those same lines the purpose of today's hearing is to discuss 
the factors that companies use to locate their research and development 
(R&D) and science, technology, and engineering intensive facilities.
    I am proud to say that my home State of California has routinely 
led the Nation in the number of R&D facilities, and hence R&D funding. 
In addition to the numerous foreign companies like Honda which have at 
least four R&D facilities in California, numerous government agencies 
like the Department of Defense (DOD), NASA, Human Health and Services 
(HHS), the Department of Energy (DOE), the National Science Foundation 
(NSF) and the United States Department of Agriculture (USDA) all have 
their R&D facilities in the great State of California. These agencies, 
along with our great research universities have forged an outstanding 
working relationship over the years, and continue to do excellent work 
in the fields of physics, life sciences, environmental sciences, and 
energy sciences. In fact I am proud to say that California's R&D 
facilities on its own, could rival most foreign countries, in terms of 
funds received and overall performance. In fiscal year 2004 California 
received $19.9 billion dollars in federal R&D funding.
    California's ability to lead the Nation in the field of R&D can be 
attributed to many factors that I am sure today's witnesses will expand 
upon in their testimony today, but allow me to mention a few. Typically 
the State of California leads the Nation in the number of doctoral 
scientists, doctoral engineers, and science & engineering post-
doctorate degrees conferred. Not to mention the fact that California 
residents typically lead the Nation in the number of utility patents 
held.
    Therefore, I believe that our witnesses will agree that amongst 
other factors, the key components to locating R&D facilities are 
innovation and entrepreneurship. Innovation obviously comes in the form 
of an educated populous that is motivated in the field of Science, 
Technology, Engineering, and Math (STEM). This requires amongst other 
things a commitment that starts at the grade school level, continues 
through high-school, and culminates with the world class research 
facilities that our universities are known for not only in California, 
but around the Nation.
    In terms of entrepreneurship, it is important that we continue to 
support venture capitalists that create the small businesses that are 
the backbone of the American economy. Google and Yahoo! are just two 
examples of American small business success stories. Along those same 
lines I was happy to support H.R. 3567, the Small Business Investment 
Expansion Act, last week which increases the investment opportunities 
for angel investors and other venture capitalist.
    Allow me to end by stating that the State of California, and I 
believe that our witnesses would agree, is a perfect example of the 
type of location that inspire companies to place R&D firms at various 
locations. We have the human capital in the form of a highly educated 
workforce, the necessary infrastructure in places like Silicon Valley, 
strong Intellectual Property laws to protect a company's investment, a 
strong university system, and a great quality of life. Coupled with an 
effort to address the lack of necessary H-1B visas to meet the needs of 
the tech industry, we can continue to be the world's leaders in R&D.
    Mr. Chairman, I yield back my time.

    Chairman Wu. At this point, I would like to introduce our 
witnesses. Dr. Martin Kenney is Professor of Human and 
Community Development at the University of California, Davis, 
and Senior Project Director at the Berkeley Roundtable on the 
International Economy at the University of California, 
Berkeley.
    Dr. Robert Atkinson is the President of the Information 
Technology and Innovation Foundation. Mr. Steve Morris is the 
Executive Director of the Open Technology Business Center in 
Beaverton, Oregon. Mr. Mark Sweeney is a Senior Principal at 
McCallum Sweeney Consulting.
    Dr. Jerry Thursby will be introduced by Dr. Gingrey in a 
moment, and as our witnesses should know, spoken testimony is 
limited to five minutes. Your written testimony will be 
submitted in full, and after your testimony, the Committee will 
have five minutes each to ask questions.
    And Dr. Gingrey, if you would care to introduce our 
witness.
    Mr. Gingrey. Mr. Chairman, thank you for giving me the 
opportunity.
    Of course, it is always a great pleasure to have someone 
from my alma mater, the Georgia Institute of Technology in 
Atlanta, Georgia, to be with us as a witness, as they do such a 
great job, and we are looking forward today, Mr. Chairman, to 
hearing from all of the witnesses, including my colleague from 
Georgia Tech, Dr. Jerry Thursby.
    He is a member of the Strategic Management Faculty. Dr. 
Thursby holds the Ernest Scheller Jr. Chair at Georgia Tech in 
Innovation, Entrepreneurship, and Commercialization. He has 
been published extensively in the areas of econometrics, 
international trade, and the commercialization of early stage 
technologies, with a particular interest in the role of 
university science in national innovation systems.
    His work, Mr. Chairman, has appeared in such prestigious 
publications as the American Economic Review, the Journal of 
the American Statistical Association, Management Science, and 
Science, and he currently serves on the editorial board of the 
Journal of Technology Transfer, and is an associate editor of 
the Journal of Productivity Analysis.
    I am disappointed that his wife, Dr. Marie Thursby, is not 
with us today. I had some stellar things to say about her, as 
well. Dr. Thursby informed me before we started the hearing, 
Mr. Chairman, that she is in the classroom teaching, and I 
think that is fantastic because some of the students, 
particularly those freshmen and sophomores, really need the 
very best and the brightest that we have to offer, and Dr. 
Marie Thursby is certainly a part of that effort, and we are 
proud to have him with us today.
    Thank you, Mr. Chairman.
    Chairman Wu. Thank you very much, Dr. Gingrey, and we will 
now start with our witness testimony, and we will start with 
Dr. Kenney. Please proceed.

STATEMENT OF DR. MARTIN KENNEY, PROFESSOR, DEPARTMENT OF HUMAN 
   AND COMMUNITY DEVELOPMENT, UNIVERSITY OF CALIFORNIA, DAVIS

    Dr. Kenney. Mr. Chairman and Members of the Committee, 
thank you for the opportunity to take part in this important 
hearing.
    For the past five years, with Rafiq Dossani at Stanford 
University, and funded by the Alfred P. Sloan Foundation 
Industry Studies Grants, I have been studying services 
offshoring to lower wage economies. Today my remarks will focus 
on India and China.
    R&D globalization is not new. Large U.S. firms have had 
laboratories in high labor cost foreign nations for decades. 
Conversely, most large foreign firms have U.S. R&D operations. 
The new phenomenon is the rapid expansion of R&D facilities 
operated by U.S. firms in China and India. The main reasons for 
R&D offshoring to China are a combination of product 
localization, government pressure, proximity to key customers, 
but cost is an important factor. In the case of India, cost and 
decreasing the time to market are the primary motivations. All 
assume that there are skilled persons available.
    The Indian and Chinese R&D workforces are growing rapidly. 
Today there are approximately 140,000 R&D engineering services 
and software products workers in the Indian export sector. It 
is growing at about 20 percent per annum, and sales will be 
approximately $8 billion in 2007. Overall, in 2006, India 
exported $31.9 billion of services. Total employment was 1.25 
million. A recent OECD report, using Chinese government 
statistics, estimated that China has 1.1 million S&T 
researchers. There are no statistics regarding how many are 
exporting R&D services, but it is surely very small, though 
they may be exporting their services embodied in physical 
goods.
    As a comparison, the NSF data for 2003 finds that 
approximately 1.16 million U.S. workers are engaged in private 
sector R&D. An increasing number of U.S. IT firms have their 
largest foreign workforce in India. To illustrate, as of 2007, 
Adobe India had 1,000 employees, filed for 50 patents, and had 
global responsibility for producing software upgrades for two 
key products, PageMaker and FrameMaker. Today, IBM has in 
excess of 60,000 Indian employees and over 100 Ph.D. 
researchers. With IBM setting the pace, other U.S. IT service 
providers are expanding in India. This is not surprising, since 
competition with the Indian service providers, with their far 
lower cost bases, is heated.
    Firms in other industries are offshoring. The GM R&D 
laboratory in Bangalore employs 500 professionals. GE has four 
R&D locations globally. GE's New York research headquarters 
employs approximately 1,900. The new Munich center employs 150, 
and the Shanghai center employs approximately 150. The 
Bangalore center has nearly 3,000 researchers. Also, the Indian 
service providers have large contract R&D arms. For example, 
Wipro, with 15,000 engineering professionals, claims to be the 
world's largest contract engineering firm.
    Less is known about the extent and type of MNC R&D in 
China. For 2004, the OECD found that 166 firms had R&D 
facilities. The largest employer, Motorola, had 1,600 engineers 
in China. These MNCs were most likely to be developing new 
products or modifying existing products for the Chinese market.
    Less prevalent was the expiration of new products for the 
global market or basic research. There is significant concern 
about intellectual property protection in China, and yet, 
despite the IP protection situation, MNCs are increasing their 
R&D commitment.
    There are clear differences between the two nations. Much 
of the R&D in China is localization work or developing products 
for the domestic market. In India the focus is cost reduction 
and reducing time to market for products intended for the 
global market. The conceptualization and architecting of new 
products, strategic research planning, and product roadmapping 
will, for the most part, remain in the United States.
    In terms of industry, R&D globalization is furthest 
advanced in the IT sector. In traditional manufacturing firms, 
R&D globalization is less advanced, but growing rapidly. The 
pharmaceutical and biotechnology industries are offshoring drug 
R&D more slowly.
    Many nations have tax, cash, and in-kind incentives to 
attract R&D. China has schemes to encourage R&D by both 
domestic firms and MNCs. Also, informal pressure is used on the 
MNCs. As a generalization, India has no specific incentives. In 
India, R&D, like most other exported services, operates in 
technology parks where firms are exempt from all corporate 
income tax until 2010.
    One vital U.S. research strength is our research 
universities that remain the finest in the world. Congress has 
done a remarkable job in providing research funds that have 
kept us at the cutting edge. With the America COMPETES Act, 
more moneys are to be appropriated to the physical sciences and 
engineering.
    What might we do to ensure our continuing supremacy? First, 
we need to find ways to address the spiraling cost of graduate 
education. Second, to ensure the continuing supremacy of U.S. 
research universities in the information sciences, Congress 
might consider creating a National Institute of Information 
Sciences. The operation of the 1980 Bayh-Dole Act has, in many 
cases, spawned university bureaucracies that retard technology 
transfer.
    Four, with understanding that innovation requires 
information, it is vital to reestablish the balance between 
patent protection and increasing the stock of freely usable 
knowledge. The lowering of technological, legal, and political 
barriers to trade has made R&D globalization a natural outcome. 
It is impossible, in the current political and economic 
environment, to see how this trend can be reversed.
    However, the implications of offshoring may be felt most 
acutely in the next recession, when firms must decide whether 
and where to eliminate excess employees. For high wage nations, 
success in the global economy is ever more dependent on the 
ability to grow new industries. Innovation, entrepreneurship, 
technology and science, are keys to continuing prosperity. 
There are enormous opportunities for the U.S. economy, which is 
the most diverse and creative in the world.
    Success will be based on increasing the capabilities within 
our workforce, even as large numbers of capable workers, paid 
far less than ours, enter the global labor market. Fashioning 
policies to meet this new challenge will be difficult, but as a 
nation, we have no choice.
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Kenney follows:]
                 Prepared Statement of Martin Kenney\1\
---------------------------------------------------------------------------
    \1\ Martin Kenney thanks the Alfred P. Sloan Foundation Industry 
Studies Program for funding the micro-level, field-based Industry 
Studies research that informs this presentation. The work on India was 
done with long-time collaborator Rafiq Dossani. I also thank my 
colleagues Martin Haemmig and Donald Patton with whom much of the work 
underlying this testimony was conducted. I also thank Kaley Lyons for 
research support in the preparation of this testimony.
---------------------------------------------------------------------------
    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to take part in this important hearing. I was asked to 
speak about the criteria firms use for locating their R&D sites in a 
globalizing world. For the past five years, with Rafiq Dossani of 
Stanford University and funded by Alfred P. Sloan Foundation Industry 
Studies grants, I have been studying services offshoring to lower wage 
economies. Today, my remarks will focus on R&D offshoring to India and 
China.
    R&D globalization is not new. For example, IBM and many large 
pharmaceutical firms have had laboratories in high labor-cost foreign 
nations for decades. Nearly every major European or Japanese firm has 
R&D operations in the U.S. (see, e.g., Serapio et al., 2004). Recently, 
though, a new phenomenon has emerged, namely the rapid expansion of R&D 
facilities operated by firms from high labor cost nations in lower 
labor cost developing nations, in particular, China and India, along 
with Russia, Eastern Europe, and Brazil. My testimony focuses upon 
China and India because they have been the most important lower-wage 
nation recipients of R&D investment.
    During the last two decades the work of what Robert Reich termed 
``symbolic analysts'' has been digitized. With the advent of 
digitization the information has been freed from its physical media, 
and, as a result, can be shipped anywhere in the world (or, more 
correctly, workers from anywhere in the world can log into a database 
housing this information). The implications are profound. Not only 
might personnel in disparate locations collaborate on the same database 
or software programs, but R&D personnel might collaborate on designing 
the same artifact, be it an aircraft wing or an insulin pump.
    R&D is a broad category of business activities including everything 
from relatively mundane product improvement and product localization 
work to the most sophisticated Ph.D.-level research conducted at the 
cutting edge of science or engineering. As a generalization, most R&D 
offshored to India and China is mundane, but some cutting edge work is 
being done, particularly in the research laboratories of firms such as 
Google, IBM, Microsoft, and Yahoo!. I was asked to limit my remarks to 
the R&D operations of MNC firms, though I will extend this mandate to 
encompass the Indian IT service providers that are now providing 
development work to global firms on an outsourcing basis. I would 
suggest that there is one other important missing variable in this 
discussion and that is the pattern of venture capital investing in 
these two emerging economic giants, but I shall not discuss this 
important phenomenon.
    To answer the questions posed by the Subcommittee, my testimony is 
structured in the following manner. First, I discuss the different 
reasons for offshoring R&D and provide real world examples throughout. 
I suggest that, in many cases, as, for example, product localization 
and developing new products for the foreign market creates only minimal 
competition for U.S. workers. Other types of R&D globalization may 
create greater competition and thereby have more significant 
implications for the U.S. In the second section, I discuss the trends 
in R&D offshoring with respect to India and, to a lesser degree, China. 
The third section briefly discusses governmental policies adopted by 
India and China to attract MNC R&D. In the conclusion, I suggest some 
policies that might help bolster U.S. leadership in commercializing the 
fruits of R&D.

Factors Influencing Site Selection for Offshore R&D Facilities

    There is an ample literature on R&D globalization, in general. It 
can provide some insight into the site selection decision, but, 
generally it has not dealt with situations where there are very large 
wage differentials. Table One is a list of some of the more important 
reasons for offshoring. Prior to discussing the various reasons for 
site selection, it is important to state that only in cases of extreme 
compulsion will a private firm place an R&D site in a location that 
does not have at least some suitable personnel that can be employed.\2\ 
In other words, the statement that firms are locating somewhere to 
access the local ``talent'' is trivial.
---------------------------------------------------------------------------
    \2\ An example of this is the difficulty the Chinese government has 
had despite many schemes and subsidies in getting Chinese or foreign 
firms to locate in Western China.
---------------------------------------------------------------------------
    In Table One, each reason is presented as separate and dichotomous; 
despite the fact that almost always the decision to establish an R&D 
facility either domestically or abroad is due to a combination of 
factors. To illustrate, a cell phone manufacturer with large market 
share in China might experience significant pressure to undertake R&D 
in China. The manufacturer might also feel that future success is 
dependent upon customizing its phones for the Chinese market. Here, 
having a design and development team in China would be desirable in and 
of itself. So the pressure combined with the opportunity would be 
sufficient to overcome opposition for other reasons, such as concern 
about intellectual property (IP). Another example would be a firm with 
a significant manufacturing operation in a nation, it might find it 
helpful to have a small laboratory in proximity to its factory. These 
decisions would be even easier if the R&D personnel were less expensive 
than in the firm's home nation, all other things being equal.
    Academic research suggests that understanding R&D facilities 
through observations at single points in time is hazardous, because 
there are almost always changes, as a firm's strategy, market position, 
and the external market evolve. An assumption that the evolution of an 
R&D facility moves unilinearly from say a government-mandated 
investment to one based on access to skilled personnel is unfounded. 
R&D facilities may evolve from having one objective to having multiple 
objectives or vice versa. Finally, firms may completely abandon an R&D 
facility if market conditions change dramatically.
Government Compulsion
    Government compulsion, as a motivation for offshoring, comes in a 
wide variety of forms. For example, it can be mandated that foreign 
firms selling in the domestic market must invest a certain percentage 
of profits and sales in local R&D. More subtly, there may be a informal 
``pressure'' applied by local officials. These forms of attracting R&D 
are unlikely to be captured through firm surveys. Anecdotally, it is 
widely reported that Chinese government officials apply considerable 
pressure to MNCs to upgrade their sales or manufacturing operations to 
include R&D. For example, the Danish firm Novo Nordisk, which has 70 
percent of the Chinese diabetes market, established its first R&D 
laboratory outside of Denmark in Beijing, in part due to informal 
pressure from the Chinese government (Kjersem, 2006). Firms such as 
Cisco, Intel, and IBM having significant market shares in China are 
almost certain to experience significant informal pressure from 
government officials to establish local R&D operations.
    In the case of India, Boeing, as part of a deal to sell aircraft to 
Air India, agreed to $1.8 billion in offsets that had to be invested in 
India. To fulfill its offset obligations, Boeing is purchasing 
engineering services from Indian firms and considering establishing its 
own engineering subsidiary in India (The Economic Times, 2007). In this 
case, the Indian government is, in effect, forcing Boeing to open 
facilities, which will include engineering, in India. In this case, it 
is simply quid pro quo. These illustrations show that sovereign 
governments can impact the decision to establish an R&D facility 
abroad.
Localization and Access to Dynamic Markets
    Very often foreign markets differ in substantial ways from a firm's 
home markets. Market entry may require localization, a process that may 
necessitate product reengineering or other substantial revisions. For 
example, to sell software in China, code must be rewritten to ensure 
that software is usable for Chinese-language speakers. This is 
considered development and is done in an R&D facility, very often in 
the country where the sales will take place. Similarly, foreign cell 
phone manufacturers must either transfer the specifications and 
schematics of their phone models to a Chinese development facility or 
do localization in some other usually higher cost location. Employing 
local engineers lowers costs. The local engineers can go a step 
further, redesigning and de-featuring the model to further lower cost 
and make the phone accessible to even more consumers. Sometimes this 
lower cost phone can then be exported to other markets.
    In the case of localization, the establishment of an offshore R&D 
facility may relocate employment from the developed nation to a 
developing nation, but it also allows the model developed in the home 
nation to have a longer life and be more profitable. In effect, it 
creates a division of labor. For the MNC, the ability to localize 
effectively may be critical to capturing new markets. In the case of 
India, the market is smaller and since the language problem is not as 
prominent, there is less localization of R&D. But there are examples, 
such as Texas Instruments India that designed a single chip that 
combines all the functions of the multiple chips in a cell phone, 
thereby dramatically reducing the cost of cell phones and thus allowing 
market expansion to lower-income groups (Mitra, 2006).
Proximity to Key Customers
    For suppliers, proximity to a key customer's facilities may be an 
important marketing advantage. So, for example, Intel has an enormous 
and increasing number of customers in China and proximity to their 
operations is important both in terms of a show of commitment, but also 
to be able to rapidly respond to their needs/issues. Similarly, the 
Chinese telecommunications equipment market is growing rapidly, 
therefore firms such as Cisco and Juniper Networks require an R&D 
presence to satisfy their customer's desires. The establishment of such 
R&D facilities is driven by a headquarters' estimation of the current 
and future importance of its customers, and is not directly driven by a 
desire to access qualified personnel or cost concerns.
Access to Highly Qualified Personnel
    For certain types of R&D, access to qualified personnel can be the 
most important factor governing R&D location. For example, nearly every 
major information technology firm in the world has some sort of R&D 
operation in Silicon Valley. In the past many saw this as a problem. 
Their reasoning was that foreign firms were accessing technology to 
transfer it abroad. What was not understood was that having these firms 
in Silicon Valley REINFORCED its primacy in the global IT economy. By 
being in the region and communicating, while accessing information, 
these firms transmitted information into the ecosystem and, of course, 
hired or transferred skilled persons into the ecosystem, thereby 
increasing Silicon Valley's global salience. In this case, despite wage 
rates, which many consider exorbitant, the specialized personnel and 
unique information dominate cost considerations. The U.S. has been an 
enormous beneficiary of these investments.
Around the Clock Engineering
    Having global R&D operations allows a firm to take advantage of the 
fact that normal operating hours differ by time zones. Here, the 
savings is in development time. Such a strategy does not imply that 
lower-cost offshore personnel should be used. However, the ability to 
use lower-cost personnel would, of course, be an attractive added 
bonus. There are a variety of ways in which this natural phenomenon can 
be utilized.
    The most obvious, but often relatively difficult to manage, 
strategy is to undertake work in say, North America, and then 
electronically transfer the project to another location, say India or 
Europe, where they continue the work. Though simple in concept, this 
can become unmanageable when there are difficulties requiring immediate 
communication with the offshore team that has already gone home. 
Another strategy entails having the lower-cost foreign engineers do the 
less desirable debugging and testing for the U.S. programmers 
overnight. Here, the foreign engineers are given the low-skill, more 
routinized tasks while the U.S. programmers do the more challenging 
work. Over time, this strategy can have problems as the most skilled 
engineers in any nation want to work on the hottest projects.
    Another strategy has been to take a development project and divide 
the work into various modules, allowing autonomous progress until 
various benchmarks are met then the modules are integrated. Here, there 
is the advantage of a division of labor, but it need not be 
hierarchical. The foreign modules may be just as sophisticated as those 
done in the U.S. In this case, there is no explicit time-saving, as the 
foreign team could just as easily sit in the U.S. The motivation is 
cost-saving, as the work could be done in the home nation, but for a 
much higher price.
Access to a Lower-Cost Labor Force
    In market economies lower cost labor forces have always held an 
attraction, particularly if the quality of their production is roughly 
comparable to that of an existing work force. This is at the heart of 
Richard Freeman's (2005) observation about the doubling of the world's 
workforce through increased access. For firms of all sorts, the ability 
to access adequately trained, college-educated personnel at a cost of 
between 40-60 percent less than those in their developed home nations 
is an ample attraction. It is, of course, not easy managing across 
borders, but for many U.S. firms efficiently utilizing their offshore 
and, particularly, Indian work force is of vital importance in ensuring 
their profitability. In the last month, EDS, which has in the past two 
years hired and acquired in excess of 20,000 Indian employees for its 
global operations, announced that 12,000 U.S. employees will be 
terminated. Unless these 12,000 were unskilled, cost must have been a 
consideration. Thus, in the same ways manufacturing was offshored in 
the past, certain service and R&D functions are being offshored today.
    Consider the cost differences. The VC-financed Indian firm Tejas 
Networks designs sophisticated telecommunications switches (i.e., its 
products compete with those of Cisco, Huawei, and Alcatel/Lucent). Were 
the firm to have been established in Silicon Valley, it would have cost 
between $100-150 million, whereas Tejas, which is now on the verge of 
positive cash flow, cost between $30-50 million--a dramatic difference 
(Tejas Network executive, 2006). In the case of a software/ASIC design 
firm, the cost comparison for 50 engineers in India, with an average 
cost of $40,000 per year in Bangalore, yields a burn rate of $2 million 
per year versus in Silicon Valley where the average salary would be 
$180,000 per year for a burn rate, in wages alone, of $9 million per 
year (Indian startup firm executive, 2006). There are, of course, many 
disadvantages to locating in India rather than Silicon Valley, but the 
cost equation is quite compelling. Similar cost advantages would be 
true for any other firms locating R&D operations in India.
    Nearly all firms are under cost pressure from rivals or 
stockholders intent upon increasing their returns. The existence of an 
accessible lower cost labor force is a natural attractant. For 
commodity-style work it may be difficult to resist the ``India price'' 
for a service. Today, U.S. service workers are being introduced to 
offshore competition from lower-wage workers from around the world, but 
especially from India.
Section Summary
    This section has briefly summarized a variety of reasons that a 
firm might want to offshore its R&D to a low-cost nation. Cost 
emphatically is not the only reason for offshoring. For many operations 
in China, some combination of product localization, government 
pressure, and proximity to key customers help explain the corporate 
decisions. Low-cost engineering personnel are also significant. There 
is also an elite strata of brilliant global-class science and 
technology talent that MNCs will pursue where ever they are located--
and with their huge numbers of people it is not surprising that some of 
them are located in India and China. R&D facilities are established in 
various locations to access different qualities in the labor force. The 
next section examines offshore R&D operations and provides 
illustrations of MNC strategies in globalizing their R&D operations to 
India and China.

Trends in R&D Offshoring

    Measurement of R&D offshoring is difficult for the following 
reasons: First, firms are not required to report on their R&D in any 
uniform manner. Second, it is difficult to precisely define R&D. Many 
activities, such as porting a software platform from say the Microsoft 
operating system to Linux, are relatively routine and are considered 
development. On the other hand, upgrading a proprietary banking 
software application is usually not considered development.
    Today, the dominant destination nations for R&D offshoring are 
India and China. Their importance is, perhaps, best illustrated by a 
survey of 300 executives conducted by the Economist (2007) asking which 
nations were the best overall overseas location for R&D investment 
(excluding their home nation). Approximately 28 percent answered India, 
approximately 23 percent answered the U.S., and another 14 percent 
answered China. The remaining answers were scattered among various 
nations with Canada a distant fourth place (seven percent). Many non-
U.S. executives saw the U.S. as the most important location. If we 
believe that U.S. executives consider the U.S. the most important 
location, India is still the second most important location. In 2007, 
it is not an exaggeration to suggest that for U.S. R&D managers, the 
three most important nations are the U.S., India, and China (the 
European Union as a whole would be of similar importance).
    The Indian and Chinese R&D work forces are still smaller than that 
of the U.S. The latest NSF data suggests that in 2003 approximately 
1.16 million U.S. workers were engaged in private sector R&D (NSF 2005; 
2007) and that four million U.S. workers with Bachelor's degrees were 
employed in science and technology occupations. Despite the rapid and 
continuing annual growth rates of 20 percent per year, the 140,000 
private sector R&D workers in India is small when compared to the U.S. 
The OECD (2007), using Chinese government statistics, estimates that 
China has 1.1 million science and technology researchers of all types. 
By the U.S. standard, India and China are still laggards.
India\3\
---------------------------------------------------------------------------
    \3\ This section draws heavily upon Dossani and Kenney (2007a, 
2007b).
---------------------------------------------------------------------------
    The Indian GDP of $805 billion in 2006 is significantly smaller 
than the $2,527 billion Chinese economy. However, India exported $31.9 
billion of services (Nasscom, 2007), there are no comparable statistics 
for China, but its service exports are significantly less. Of 
particular importance is the increase of the R&D, engineering services, 
and software products category to $6.5 billion. It is estimated that 
this will increase by a further 22 percent to approximately $8 billion 
in 2008. In 2006 total employment in the services export sector was 
approximately 1.25 million. Employment growth is expected to continue 
at in excess of 20 percent per year. As a gauge of the importance of 
the entire industry to India, in 2007 the IT service industry generated 
5.2 percent of national GDP (Nasscom, 2007).
    Indian wages are indicative of the cost savings that can be 
achieved. According to one source, for fresh bachelor degrees there are 
roughly three tiers with different wages. In the first tier, Google, 
Yahoo, Microsoft, and eBay will pay $30,000 to $35,000 for IIT's best 
graduates. The second tier of firms are Cisco, TI, and the Silicon 
Valley startups that pay between $15,000 to $20,000 and primarily 
recruit from the top tier of the best regional colleges and the middle 
rung of the IITs. The Indian outsourcers such as TCS and Infosys employ 
the third tier and pay approximately $10,000 per year.
    To understand the growth in Indian service provision and the rise 
of significant R&D potential, illustrations from various MNCs are 
useful. Table Two provides the employment in India by various non-
Indian software and software services firms. What is most remarkable is 
the scale of the operations. In India an increasing number of U.S. 
software firms have their largest foreign workforce. To illustrate, as 
of 2007, Adobe had 1,000 employees in India and had already filed for 
50 patents developed by its Indian employees (Gupta, 2007). Adobe India 
has been given global responsibility for producing software upgrades 
for two key products, PageMaker and FrameMaker.
    Among the software services firms, growth has been organic through 
hiring and inorganic through the purchase of Indian firms (see Table 
Two). It is important to note that the vast majority of this employment 
is NOT in R&D, but rather more mundane service provision. The largest 
of these MNCs, IBM, only reestablished its operation in India in 1992, 
but the preponderance of its growth has been since 1999. Today, IBM has 
approximately 60,000 Indian employees and expects this to grow to 
100,000 by 2010. To speed its growth, in 1994 IBM acquired a leading 
Indian business process firm, Daksh, with 6,000 employees. In 2004, it 
acquired the 1,400-employee Network Solutions, which specialized in IT 
infrastructure services. In terms of R&D, IBM has research laboratories 
in both Delhi and Bangalore and, according to a recent New York Times 
article, employed 100 Ph.D. researchers in India in 2006 (Rai, 2006).
    With IBM setting the pace, other U.S. IT service providers are also 
rapidly expanding. For example, EDS, which entered India in 1996 as a 
GM subsidiary, began its expansion even later, and as of 2005 it had 
only 3,000 employees in India. In 2006, EDS management decided that it 
had to rapidly build its offshore operations, so it acquired the 11,000 
person Indian business process firm MphasiS, and in 2007 acquired the 
700-person firm RelQ. Simultaneously, it accelerated hiring at its 
existing Indian facilities. To be sure, it is not only U.S. domiciled 
organizations that are responding, as Table Two shows, the largest 
European outsourcing firms are rapidly increasing their presence in 
India.\4\
---------------------------------------------------------------------------
    \4\ In fact, in recent months there have been a spate of articles 
in the industry press suggesting that the relative tardiness on the 
part of European software services firms to offshore to India has put 
them at significant disadvantage when compared to their U.S. and Indian 
rivals.
---------------------------------------------------------------------------
    The reason these MNC service providers are expanding their presence 
is not surprising, since competition with the Indian service providers, 
with their far lower cost basis, is heated. In the 2006 EDS Annual 
Report, its Chairman and CEO reporting improved results observed, ``We 
continued to realign our work force with strong offshore capabilities, 
making us more price competitive and responsive to client needs. We 
more than doubled our presence in high-quality, lower cost locations to 
32,000 employees. While India was the primary beneficiary, we also are 
migrating our work force to other regions such as Latin America, China, 
Hungary and Poland.'' Each of the major MNC service providers faces a 
similar conundrum, namely a cost structure that is difficult to sustain 
in a globally competitive environment.
    The MNC service providers establishing facilities in India have 
been joined by firms from a wide variety of other industries. For 
example, major retailers, such as Target Corporation, have large Indian 
subsidiaries. According to Robert Kupbens, the Vice President for 
Technology in Technology at Target Corporation (2007), in August 2006 
Target Corporation opened its Bangalore subsidiary, and in mid 2007 
employed 500 persons, but expected the Indian operation to grow to 
3,000 by 2009. The types of work to be performed in India are 
indicative of the evolution of these offshore subsidiaries. By the end 
of 2007, operational responsibility for Target.com will be in India. 
The spectrum of work will also expand, as a financial team is being 
formed to do analysis. The India team even does photo retouching and 
newspaper circular layouts for the U.S.
    In traditional manufacturing sectors such as automobiles, the 
McKinsey Global Institute (2005) identified R&D and engineering as most 
vulnerable to offshoring and found that 44 to 45 percent could 
theoretically be relocated. Moreover, this included not only simple low 
skilled engineering. For example, General Motors (GM) is a leader in 
relocating R&D and certain elements of design. Its offshore centerpiece 
is a laboratory in Bangalore employing approximately 240 professionals 
in 2004, 400 in 2006, and has announced that it is expanding employment 
to 800 persons by 2008. The skills being recruited are fascinating. In 
July 2005, the laboratory advertised jobs for individuals with Master's 
degrees or, preferably, Ph.D.s, in aerospace, computer, industrial, 
mechanical, and software engineering and computer and materials 
science. In the materials laboratory, GM sought candidates with 
Master's degrees and Ph.D.s in metallurgy, polymer science, materials 
science, materials processing, and math-based analysis of materials. In 
the material process modeling group, the work included validating 
microstructural models, designing high-performance materials, and 
molecular modeling of nanocomposite/TPO exfoliation and fuel cell 
membranes (General Motors, 2005). These job descriptions illustrate the 
engineering activities being offshored by industrial corporations. 
Moreover, GM is not alone, as Caterpillar, Delphi, and others build 
their Indian R&D operations.
    The case of Agilent Technologies India (AGI) illustrates the 
rapidity with which an Indian operation can mature. AGI was established 
in 2001 to undertake both back office and engineering services. Its 
initial engineering services work was simple data entry. However, the 
operation rapidly matured and began doing CAD support the next year. 
The next task it undertook was QA for product development. In 2003, 
electronic design automation software development commenced in India. 
Success in these initial projects encouraged the addition of an ASIC 
design center in India, only the fourth one that Agilent operated 
globally (Dossani and Manwani, 2005). In April 2006, AGI announced that 
it had purchased 10 acres of land in the Delhi area to build its own 
campus. Employment growth was rapid, as it had no employees prior to 
November 2001, and by November 2004 had 1,200 employees with plans to 
increase to 2,000 by 2006. Agilent India is expanding in three ways: 
First, its engineering capabilities are growing rapidly. Second, more 
of the firm's global back office operations are being relocated to 
India. Finally, the Indian market for its test and measurement 
equipment is burgeoning.
    Yahoo! has rapidly expanded its Indian operation. In 2003 Yahoo! 
established its Indian Development Center (IDC) and hired 150 engineers 
(Seth, 2006). It has since grown to nearly 1,000 employees in December 
2006. But, from our perspective, what is more interesting is how its 
work has evolved. Initially, the IDC operated as a low-end engineering 
back office for Yahoo! Palo Alto. In general, the work transferred to 
India was low value-added and mundane. One result was high rates of 
attrition sapping the cost savings. To address this problem, in 2004 
Yahoo! moved first-level project management to India, a step that gave 
the Indian operation greater ownership, but created conflicts with 
U.S.-based managers. The solution was relocating complete 
responsibility for major activities such as datamining. Now the Indian 
functional manager reports directly to a SVP in Palo Alto. With the 
increasing success of the Indian operation, functional responsibility 
not only for datamining, but also for mobile applications and iPod 
broadcasting, has been transferred to India (Seth, 2006).
    These are indicators of learning and maturation. These anecdotes 
indicate that at certain MNCs, their Indian operations have matured 
sufficiently to receive global mandates--a powerful indication of an 
ability to mobilize talented persons and ascend the value ladder. 
Possibly the most interesting case is General Electric (2007), which 
has only four research locations globally. Its New York Research Center 
headquarters employs approximately 1,900 persons, at the new Munich 
center approximately 150 persons are employed, and in the Shanghai 
center another 150 persons are employed. The Bangalore center employs 
nearly 3,000 researchers, i.e., more than the other three centers 
combined (General Electric, 2007). When measured by the sheer number of 
employees, the size of the GE commitment is remarkable.
    Despite this growth, the Indian operations are not comparable to 
those in the U.S. In market understanding and global project management 
the Indian operations still lag behind those in the U.S. As the manager 
of a large MNC noted, ``It is easy to do cutting-edge work in India and 
to manage large projects. The difficulty is in launching products from 
India, especially the last stage between putting it all together and 
going live. There is also a gap in capability in conceptualizing 
projects from India.'' It takes time to build sophisticated 
capabilities. And yet, these subsidiaries are becoming important.
    The final important group of firms are the large Indian service 
providers such as Infosys, HCL, Satyam, TCS, and Wipro, and smaller 
service providers such as Sasken. The large Indian service providers 
are evolving rapidly and a number of them are developing powerful 
contract engineering/R&D arms. For example, Wipro, with 15,000 
professionals, claims to be the largest contract engineering firm in 
the world. Wipro also does contract semiconductor chip design. Only 
three years ago, Wipro was largely confined to the two lower value-
added steps of Verification and Physical Design and Production and 
Silicon Production Engineering. Today, overseas customers contract them 
to provide higher value-added services in digital/analog design and 
even architecture. The benefit for the Indian vendor is that it can 
receive improved rates for the project and its Indian employees can 
develop new capabilities satisfying their desire to improve their 
skills (Personal interviews, 2006).
    The Indian service providers are broadening their businesses by 
offering ever more engineering services. For example, in 2006 TCS 
announced an alliance with Boeing to work closely with its customers to 
design the interiors of new aircraft they had purchased. This alliance 
led to TCS establishing a aircraft interior design ``laboratory'' in 
Chennai (Kurup, 2006). HCL claims to have 1,500 person-years of 
experience designing medical devices such as blood glucose meters for 
foreign customers. Often the role of the Indian firms is linked to 
their expertise in software systems, which are a rising portion of the 
cost and value-added in instruments of nearly every sort. There has 
also been a proliferation of smaller specialty engineering firms. For 
example, Sasken provides IC design and silicon platform software 
services to the world's mobile device manufacturers. To improve service 
to its U.S. customers, it recently established a subsidiary in 
Monterrey, Mexico.
    The proliferation of MNCs and Indian service firms is creating a 
powerful ecosystem that is proving attractive to yet more firms and 
also encouraging firms to undertake more ambitious and sophisticated 
activities there, including R&D (Dossani and Kenney, 2007b). Absent an 
unforeseen event, Indian service and R&D employment can be expected to 
continue to increase by 20 percent per annum at least for the next 
three years. By 2010 there will be approximately 175,000 Indians 
working on R&D and engineering services for the global economy. Firms 
such as Wipro will be the largest engineering services firms in the 
world. By then India will be a recognizable force on the world R&D 
scene.
China
    Less is known about the extent and type of MNC R&D in China. For 
example, a recent OECD report on the Chinese innovation system provides 
no employment data for the MNC R&D facilities. Even the number of 
laboratories varies widely by report. For example, in the most 
comprehensive survey of the Global Business Week 1000 and Fortune 500 
MNCs in China through 2004, the OECD (2007) found that 166 firms had 
R&D facilities. Of which, 26 were in software, 20 were in 
telecommunications, and 15 were in semiconductors. In contrast, 
Zedtwitz (2004) found that in 2005 there were 750 R&D laboratories in 
China.\5\ The largest employer was Motorola (2007a), which had 1,600 
engineers scattered across a number of cities.\6\ In summation, every 
major MNC IT firm has R&D operations of some sort in China.
---------------------------------------------------------------------------
    \5\ The reasons for this wide discrepancy may be a decision to 
count each of Motorola's 19 labs in China separately and/or the capture 
of the R&D operations of smaller firms such as those of smaller 
Taiwanese firms.
    \6\ It is worth noting that Motorola India employed 3,000 engineers 
in 2007 and 40 percent of the software in its phones worldwide was 
developed in India (Motorola 2007b).
---------------------------------------------------------------------------
    Given the wide disparity in counts of the number of MNC R&D 
laboratories in China, it is not surprising that there is even less 
known about their operations. In one of the few quantitative studies, 
the OECD found that the MNCs were most likely to be exploring products 
for the Chinese market and this was closely followed by modifying 
existing products for Chinese markets. Somewhat less prevalent was 
exploring new products for the world market (which would be the 
politically correct answer). Even less mentioned was exploring unknown 
science and technology fields, something that would most closely 
resemble basic research. The final category was R&D to support 
production and operations in China (more than one answer was 
possible).\7\ These results suggest that MNC R&D facilities in China 
tend to be domestically oriented.
---------------------------------------------------------------------------
    \7\ OECD (2007) found far fewer MNC R&D facilities than other 
surveys such as Zedtwitz (2004).
---------------------------------------------------------------------------
    There is significant concern on the part of MNCs about the 
protection of their intellectual property and know-how. The 
enforceability of IP rules is indicative of a bigger societal issue 
relating to the laws and social norms about appropriating or 
transferring the knowledge generated while working for an employer. 
Since acceptance of IP rules is more than just enforcement-driven, 
simply passing laws and then trying to enforce them is unlikely to 
rapidly change the larger social environment. Though there can be 
little doubt that Indian IP enforcement is superior to China, few would 
state that it is equal to the U.S. or Western Europe. Despite IP 
protection weaknesses, MNCs are increasing their research commitment in 
China. To take advantage of the large and rapidly growing market and 
low-cost capable workers, MNCs are careful to undertake R&D in areas in 
which there would be minimal damage from leakage to the external 
market.
    China is rapidly becoming an important location for R&D. Chinese 
domestic firms such as Huawei, ZTE, Lenovo, and Haier are investing 
significant sums in R&D and expanding their global R&D reach. They 
already have some R&D operations in the U.S. that they established or, 
as in the case of Lenovo, inherited through acquisition. Given the 
build-up of capital in China, it is only natural that they will buy 
U.S. assets--and technology is an important attractant. Simultaneously, 
MNCs will (indeed feel they must) increase their R&D activities in 
China regardless of the IP environment.
Summary
    There is a global competition for R&D facilities, but today the two 
most important destinations for R&D offshoring are India and China. And 
yet, they differ markedly in terms of the character of R&D being 
offshored to them. The greatest beneficiary, India, outside some areas 
of offsets, largely in the aerospace sector, has done little beyond 
providing a free trade zone. The Chinese government has pursued a more 
aggressive policy of encouraging MNCs to establish R&D facilities. And 
yet, India is receiving more R&D employment. From their behavior, it 
appears as though MNCs are less concerned about the potential loss of 
IP in India and thus undertake R&D there that they might not consider 
in China.
    There are other differences between the types of MNC R&D in the two 
nations. First, much of the R&D in China is localization work or 
developing products for the Chinese market. In India, until very 
recently the domestic market was of minimal interest. Second, in China 
there is large and increasing, but thus far not well-quantified, R&D 
production engineering investment by Taiwanese firms.\8\ This type of 
R&D is largely non-existent in India because it has not been an 
important manufacturing site nor are there leading customers, though 
this may be changing, particularly in telecommunications as market 
expansion is torrid.
---------------------------------------------------------------------------
    \8\ For a discussion of the spatial division of labor in the 
notebook computer industry, see Dedrick and Kraemer (2006).
---------------------------------------------------------------------------
    The salient differences between the two nations is that MNCs are 
reluctant to undertake R&D in China whose results might be easily 
copied by domestic rivals. This need not necessarily affect the 
sophistication of the R&D. For example, Microsoft undertakes extremely 
sophisticated basic research in both nations. However, firms carefully 
distinguish the types of work to be done in the two nations. To 
illustrate, Intel China's R&D is concentrated on research for system-
level software and Intel-specific projects whose disclosure would not 
put it at a disadvantage. It also has its Channel Systems Laboratory 
whose purpose is to help vendors design PCs for other environments. 
This laboratory manages five other laboratories outside of China. The 
strategy for the Chinese laboratories is to undertake projects whose 
results are either meant for the public or would be of little use to a 
competitor. In contrast, in Intel's Indian operations 50 percent of the 
employees are involved in integrated circuit development, the heart of 
Intel's business. In the future, Intel Bangalore will design server 
chips. Broadcom, another important U.S. semiconductor firm, designs 
some of its most important chips in India, where it has over 200 
designers. In contrast, its R&D facility in China was established to 
support Chinese customers, while its major design operations are 
located in Taiwan. As a generalization, in most cases among MNCs, and 
in particular IT MNCs, their more globally oriented R&D is located in 
India. While, as a rule, their Chinese R&D facilities are smaller and 
have more of a domestic focus.
Types of Facilities Sited in Low Cost Regions
    Facilities localizing an MNC's product or developing specialized 
local products are likely to be located in the low-cost country. The 
lower cost nations are far more likely to do development work, rather 
than product conceptualization. Given their superior infrastructure, 
the conceptualization and architecting of new products is likely to 
continue to be concentrated in developed nations. Strategic research 
planning and product road mapping is almost certain to remain in the 
firm's home country, though as a foreign R&D operation matures it might 
be given responsibility for designing products for its domestic market 
or be given full responsibility for product upgrades.
Sectors
    The available evidence suggests that R&D globalization is most 
advanced in the IT sector. Established firms such as IBM, HP, Motorola, 
and Texas Instruments have long had overseas R&D facilities, and newer 
firms, such as Intel, Microsoft, and Adobe, began their international 
R&D expansion in the 1990s. For the younger, but research-intensive VC-
financed firms, such as Google and Yahoo!, overseas R&D commenced even 
earlier in their development. Conversely, all major European and Asian 
IT firms have made significant investments in U.S. R&D facilities. What 
is new is the decision by nearly all of these firms to build 
significant R&D capability in India and China.
    In traditional manufacturing firms, R&D globalization is less 
advanced, but both nations are experiencing an increase in the number 
of R&D facilities (OECD, 2007). For example, according to OECD (2007), 
seven foreign auto manufacturers have research facilities in China. 
Unfortunately, there is no information regarding the types of research. 
This contrasts with the General Motors Indian facility, which describes 
the advanced research underway. Firms in the traditional manufacturing 
industries will increase the size and scope of their offshore R&D 
facilities.
    The human health care industries, though smaller than IT and 
traditional manufacturing, encompass many of the most research-
intensive firms in the OECD nations. Recent research suggests that 
there is only limited investment by the major pharmaceutical firms in 
developing nation R&D facilities (Cockburn, 2007). For example, the 
OECD identified six MNC biotechnology and pharmaceutical R&D operations 
in China. According to Yuan (2007), of the six pharmaceutical R&D 
operations in China, only two, Lilly and Pfizer, were U.S. firms. At 
this time, the pharmaceutical investments in China appear to be 
complementary rather than substitutes for R&D in the developed nations. 
Interestingly, none of the large pharmaceutical MNCs had R&D operations 
in India. Given the critical importance of intellectual property 
protection and the extreme secrecy in which human health R&D takes 
place, it is unlikely that there will be a rapid relocation of R&D 
operations to low-wage environments. And yet, given the growing 
pressure to increase profits, a plethora of organic chemists in 
developing nations, and the rising importance of developing nation 
markets, particularly, China and increasingly India, it is likely that 
pharmaceutical MNCs will gradually increase their offshore R&D. As a 
caveat to this conclusion, a significant amount of clinical trials and 
data analysis are already conducted offshore and more can be expected 
to be relocated.
    In summation, there are sectoral differences in terms of the 
globalization of R&D. IT R&D has globalized most rapidly, while 
pharmaceutical R&D is diffusing more slowly. Traditional manufacturing 
firms have only recently begun making major R&D investments in the 
lower-cost nations, but it is likely to increase.

Policies among Foreign Nations to Attract R&D Facilities

    R&D facilities are considered desirable by politicians and economic 
development professionals. Many nations have tax, cash, and in-kind 
incentive schemes to attract R&D. Some nations, such as Singapore, 
Ireland, and Israel have utilized policy to upgrade their economies. Of 
course, many nations offering similar incentives have experienced only 
minimal success. In the U.S. the Federal government has ceded such 
recruitment efforts to the state and local governments, and a number of 
them provide significant incentives to attract R&D investment. And yet, 
the most successful state in attracting such R&D investment, 
California, has few incentives, leading to the conclusion that their 
efficacy is suspect. For R&D investment there can be little doubt that 
the most effective attractor is the quality and price of the labor 
force. For example, Silicon Valley, an extremely expensive business 
location, has had great success in attracting R&D investment. What is 
obvious is that absent a capable work force, only enormous incentives 
will attract R&D investment.
    China has various tax incentive schemes to encourage R&D by both 
domestic firms and MNCs. There are many science parks willing to 
provide low-cost office space and often they have free trade zone 
protection providing tax holidays. In its desire to attract foreign R&D 
operations, some charge that Chinese government officials coerce MNCs 
into locating in China and then pressure them to share their IP. 
However, there are also dissenting Chinese voices suggesting that these 
foreign R&D operations retard the development of technology by domestic 
firms because the foreign firms charge unduly high license fees for 
their patents, ``crowd out'' domestic firms in the market for highly 
skilled labor, monopolize technology standards, and thwart technology 
transfer and knowledge spillovers (OECD, 2007).\9\ Provincial and city 
policy-makers often supplement national government policies. For 
example, Shanghai has aggressively pursued MNC R&D facility investment. 
And yet, absent a stronger legal and social environment protecting the 
fruits of their R&D, it is unlikely that MNCs will move large portions 
of their R&D to China.
---------------------------------------------------------------------------
    \9\ Obviously, MNCs have no interest in allowing the know-how and 
intellectual property that is the key to their competitiveness to leak 
to local rivals.
---------------------------------------------------------------------------
    India has no specific incentives to attract foreign R&D investment. 
The Software and Technology Parks of India regulate R&D, like all other 
exported services. STPI operates like a free trade zone and all firms 
registered under it are exempt from corporate income tax until 2010. 
These are substantial incentives, however, they are not specifically 
targeted at R&D as opposed to other services, such as call centers and 
data entry.
    China has more actively pursued R&D investment than has India. 
However, neither of them has gone after R&D investment as single-
mindedly as nations such as Singapore, Ireland, and Israel. 
Interestingly, in China there is some dissent regarding the wisdom of 
encouraging foreign R&D operations. In contrast, Indian and MNC firms 
are treated equally by STPI and there has been little dissent by 
domestic firms. This suggests that other variables, such as a superior 
IP protection environment, English-language capability, and management 
skills, are as important as a larger market and more active government 
involvement.

Conclusion and Policy Opportunities

    The current globalization of R&D is an outcome of the increasingly 
globalized and intertwined sinews of economic activity. It is 
impossible in the current economic environment to see how this trend 
could be reversed. The result of the technological, legal, and 
political lowering of barriers to trade has made R&D globalization a 
natural outcome. Absent a national consensus, for which none exists or 
is likely to ever exist, that the import of such services should be 
outlawed or taxed severely, the current trends in the globalization of 
services including R&D will continue.
    The wage gap between India and China and the U.S. is so great that 
even with wage increases of 10-15 percent per annum, it will remain 
substantial for at least the next decade. Moreover, both governments 
are expanding their higher educational systems in a bid to increase 
their supply of trained labor. Should the Indian or Chinese labor 
markets become too expensive, Russia, the Ukraine, and others also have 
significant supplies of capable engineers. Certain occupations, such as 
routine engineering, accounting, and finance are being commoditized and 
globalized. The full import of this movement by firms to access the 
skills of the global labor force has not yet been felt. The effect is 
most likely to be experienced in the next recession when firms are 
faced with the decision as to whether and where to eliminate excess 
personnel. I believe this will fall most heavily on the high-cost 
employees who have only globally available skills.
    For high-wage nations success in the global economy become ever 
more dependent on the ability to envision and grow new markets. This 
means there are enormous opportunities for the U.S. economy, which is 
the most diverse and creative in the world. It suggests our educational 
institutions must train young persons regardless of the discipline to 
be creative and entrepreneurial. The engineering and science 
disciplines are absolutely crucial as they provide the new knowledge 
that is an input to the creation of new wants and needs. For example, 
who would have guessed that Internet search and online auctions would 
become multibillion-dollar global businesses centered in the U.S.?
    The strengths of the U.S. political economy are well known. First, 
our research universities remain the finest in the world. The U.S. 
government and Congress have done a remarkable job in providing the 
research funds that have kept us at the cutting edge. With the America 
COMPETES Act, more monies are meant to be allocated to the physical 
sciences and engineering. Despite this major new initiative, the 
vitally important areas of computer science and electrical engineering 
require more targeted investment. To ensure the continuing supremacy of 
U.S. research universities in the information sciences, Congress might 
consider whether a National Institute of Information Sciences should be 
created along the lines of the fabulously successful National 
Institutes of Health. At this moment, the National Research Council is 
conducting a study of the health of the U.S. IT R&D ecosystem and the 
report will be available shortly.
    Many of the most important new venture capital-financed firms such 
as Yahoo! and Google came directly from university graduate students. 
Unfortunately, the spiraling cost of graduate education is creating an 
increasing burden on universities and departments wishing to fund these 
bright young students. Having the finest research universities in the 
world provides the U.S. with a reservoir of the most highly technically 
trained persons in the world. To allow this resource to deteriorate 
would be an incalculable and unforgivable disaster.
    A second area that the Committee may wish to explore is the 
operation of the 1980 Bayh-Dole Act, which ceded rights to federally 
funded inventions to universities. In retrospect, this was important 
for removing obstacles to the transfer and commercialization of 
university innovations. In the intervening years, every research 
university has established a Technology Transfer Office. However, as 
Robert Litan et al. (2007) conclude, university bureaucracies have 
arisen that often frustrate technology transfer. Horror stories about 
university bureaucracies frustrating technology transfer and researcher 
entrepreneurship are widespread. Well-drafted legislation vesting the 
patent rights to federally-funded research in the inventor would likely 
accelerate transfer and encourage entrepreneurship. If there is concern 
that the meager income the universities derive from licensing would be 
lost, it could be mandated that they receive a five percent stake in 
any revenues from the invention. In cases in which university 
researchers do not want to commercialize their inventions, they could 
assign the patent to the university, a third-party, or place it in the 
public domain. For certain inventions, such as techniques for gene 
splicing, stem cell creation, software inventions, or improved 
manufacturing processes, a public domain strategy would increase the 
public benefit, as adoption is likely to be even faster and more 
widespread. In other cases, assigning the patent to the university or a 
third party would be most effective. The inventor is likely to have 
better insight than any university licensing manager who cannot 
possibly know the nuances of every technology.
    The increasingly restrictive patent regime particularly in software 
may also be retarding technological development. With the growing 
emphasis on Open Source software and recombinant innovations,\10\ it is 
vital to establish the right balance between patent protection and 
increasing the stock of freely accessible knowledge. In an innovation-
based economy, in which our nation's success depends upon the value-
creating creativity of its citizens,\11\ any obstacles to the 
circulation of information, be it a too restrictive intellectual 
property regime or unnecessary secrecy, will retard the ability to 
create new value.
---------------------------------------------------------------------------
    \10\ On recombinant innovation, see Hargadon (2003).
    \11\ On the importance of creativity to competitiveness, see 
Florida (2003).
---------------------------------------------------------------------------
    Technology, innovation, entrepreneurship, and science are four keys 
to the continuing prosperity of the U.S. economy. Success will be based 
on increasing the capabilities within our workforce even as large 
numbers of capable foreign workers paid far less than ours enter the 
global labor market. The U.S. won the Cold War, succeeded in breaking 
down trade barriers, and opening markets around the world. Now, we must 
compete in this more open world. Responding to the challenges will 
require increased investment in our work force, a rethinking of our 
educational system, and strategies for increasing the creativity of the 
American people in engineering, manufacturing, design, and the arts.

REFERENCES

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Cockburn, I.M. 2007. ``Global Innovation in the Pharmaceutical 
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Dedrick, J and K. Kraemer. 2006. ``Is Production Pulling Knowledge Work 
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Dossani, R. and M. Kenney. 2007b. ``The Evolving Indian Offshore 
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Dossani, R. and M. Kenney. 2007a. ``The Next Wave of Globalization: 
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Dossani, R. and A. Manwani. 2005. Agilent's supply chain: A locational 
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The Economic Times. 2007. Boeing may pilot captive unit in India.'' 
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        (September 10) Accessed September 26, 2007)

Economist. 2007. ``Sharing the idea: The emergence of global innovation 
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Florida, Richard. 2003. The Rise of the Creative Class: And How It's 
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Freeman, R. 2005. ``What Really Ails Europe (and America): The Doubling 
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General Electric. 2007. ``GE Global Research.'' http://www.ge.com/
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General Motors. 2005. GM India science laboratory. Available online at: 
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Gupta, Naresh. 2007. ``Rediff Interview: Adobe has big plans for 
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Hargadon, Andrew B. 2003. How Breakthroughs Happen: The Surprising 
        Truth about how Companies Innovate (Cambridge: Harvard Business 
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Kjersem, Julie Marie. 2006. Investing in High-Tech in China: The Cases 
        of Novo Nordisk, GN Resound, and BenQ Siemens Mobile Thesis 
        completed at the Copenhagen Business School.

Kupbens, R. (VP, Technology Services--Marketing, TSI, Business 
        Intelligence, EDGE Target Corporation). 2007. ``Talent 
        Management in a Global Retail Industry.'' Presentation at 
        Stephen M. Ross School of Business, University of Michigan 
        (March 6) http://www.tmi.umich.edu/
        PR_Target_Kupbens_07.htm 
        (Accessed April 15, 2007).

Kurup, R.S. 2006. ``TCS to design Boeing interiors.'' (October 27) 
        http://www.rediff.com/money/2006/oct/27tcs.htm

Litan, R.E., L. Mitchell, and E.J. Reedy. 2007. ``Commercializing 
        University Innovations: A Better Way.'' AEI-Brookings 
        Institution Related Publication 07-16. http://aei-
        brookings.org/admin/authorpdfs/redirect-safely.php?fname=../
        pdffiles/RP07-16_topost.pdf

McKinsey Global Institute. (2005). The emerging global labor market: 
        Part I--The demand for offshore talent in services. Washington, 
        D.C.: MGI.

Mitra, Biswajit (Managing Director, Texas Instruments India). 2006. 
        Keynote Address at The Globalization of Services--The Second 
        Annual Conference, Stanford University (December 12).

Motorola. 2007a. ``Motorola China R&D Institute.'' www.motorola.com.cn/
        en/about/inchina/joint.doc

Motorola. 2007b. ``Corporate Fact Sheet: Motorola India.'' http://
        www.motorola.com/mot/doc/6/6293_MotDoc.pdf

Nasscom. 2007. ``Indian IT Industry: Nasscom Analysis.'' (August).

NSF. 2007. ``Asia's Rising Science and Technology Strength: Comparative 
        Indicators for Asia, the European Union, and the United 
        States.'' (August) http://www.nsf.gov/statistics/nsf07319/

NSF. 2005. ``Increase in US Industrial R&D Expenditures Reported for 
        2003 Makes Up For Earlier Decline.'' (December) http://
        www.nsf.gov/statistics/infbrief/nsf06305/

OECD. 2007. OECD Reviews of Innovation Policy: China--Synthesis Report.

Rai, Saritha. 2006. ``India Becoming a Crucial Cog in the Machine at 
        I.B.M.'' (June 5) http://www.nytimes.com/2006/06/05/technology/
        05ibm.html

Serapio, Manuel G., Hayashi, Takabumi and Dalton, D. 2004. 
        ``Internationalization of Research and Development: Empirical 
        Trends and Theoretical Perspectives.'' M.G. Serapio and T. 
        Hayashi (eds.), Internationalization of Research and 
        Development and the Emergence of Global R&D Networks, Oxford: 
        Elsevier.

Yuan, R. 2007. ``Pharmaceutical Operations Expand in China: 
        Multinationals Set Up New Facilities in Asia.'' Genetic 
        Engineering and Biotechnology News 27, 8 http://
        www.genengnews.com/articles/chitem.aspx?aid=2098&chid=4

Zedtwitz, M.v. 2004. ``Managing Foreign R&D laboratories in China.'' 
        R&D Management 34, 4:439-452.
        
        
        

                      Biography for Martin Kenney
    Martin Kenney is a Professor at the University of California, Davis 
and a Senior Project Director at the Berkeley Roundtable on the 
International Economy. He is a fellow at the Center for 
Entrepreneurship at UC Davis. He has authored or edited five books and 
over 120 scholarly articles on the globalization of services, the 
history of venture capital, university-industry relations, and the 
development of Silicon Valley. His two recent edited books 
Understanding Silicon Valley and Locating Global Advantage (with 
Richard Florida) were published by Stanford University Press where he 
is the editor of a book series in innovation and globalization. 
Currently, he is preparing a book on the history and globalization of 
the venture capital industry. He was a visiting professor at the 
Copenhagen Business School, Cambridge University, Hitotsubashi 
University, Kobe University, and Tokyo University. He has consulted for 
or presented to various organizations including the InterAmerican 
Development Bank, the World Bank, Presidential Council of Advisors on 
Science and Technology, National Academy of Engineering, National 
Academy of Sciences, National Research Council, Association of 
Computing Machinery, and the OECD and consulted for various firms. His 
research is currently supported by the NSF, the Sloan Foundation, and 
the Kauffman Foundation.

    Chairman Wu. Thank you, Dr. Kenney. Dr. Atkinson, please 
proceed.

  STATEMENT OF DR. ROBERT D. ATKINSON, PRESIDENT, INFORMATION 
              TECHNOLOGY AND INNOVATION FOUNDATION

    Dr. Atkinson. Thank you, Mr. Chairman, Dr. Gingrey, and 
Members of the Committee. I appreciate the opportunity to 
appear before you.
    I have focused on this issue of both economic development 
and site location, particularly in the R&D area, for a long 
time, including when I was a Project Director at the former 
Congressional Office of Technology Assessment. And I think 
there is a lot of--one of the issues that is hard to understand 
about this particular challenge is that it is relatively new. 
There isn't as much research on it as we would like, but even 
given that, I think, there are some things that we can say 
somewhat definitely about what is happening--why it is 
happening.
    I don't think there is any doubt that there has been a 
significant increase in U.S. offshoring of R&D in the last 
decade. In the last decade, the share of U.S. firms' R&D sites 
went from 59 percent of them being here in the U.S. to 52 
percent being in the U.S. The share in China and India 
increased from eight to 18 percent. So decline in the U.S.--and 
the increase is largely in China and India.
    According to a recent survey by the Industrial Research 
Institute, which is a trade association of R&D managers, the 
U.S. R&D managers, over 60 percent of U.S. companies are 
investing R&D in China, 50 percent in India, and 20 percent in 
Eastern Europe, and that is growing faster than their R&D 
investments in other places.
    I think if you look at the effect of that, there is some 
debate about that, is this a complement, or a substitute? I 
think the evidence is pretty clear it is a substitute. 
According to BEA numbers, between 1998 and 2003, which was the 
latest data that they provide, investment in R&D by U.S. 
majority owned affiliates increased outside of the U.S. by 52 
percent. Total R&D, corporate R&D in the U.S., by U.S. and non-
U.S. firms that would include insourcing of R&D increased by 
just 26 percent, so at half the rate. And that trend has gone, 
they recently, just in 2005 and 2007, U.S. rates increased 
about half of the rest of the world.
    What is driving this? I think there is--you will hear a 
debate, I think probably today, and there is a debate somewhat 
in the literature, but I would agree with Dr. Kenney. I think 
at the end of the day, while there are multiple factors that 
determine particular types of R&D outsourcing or offshoring, by 
the type of R&D, by the type of firm, by the type of country, 
costs, I would argue, is the major driver. That is not to say 
that access to market and access to talent aren't a factor, but 
I think cost is the major driver. You have got salaries for R&D 
personnel in China that are one-sixth of the U.S., and very 
good talent over there. So, for example, the recent Booz Allen 
Hamilton study showed that when it comes to moving R&D to 
developing nations, low cost skills base was the predominant 
factor.
    And I would differentiate between developing and developed. 
The cost is not a big factor, really, or the major factor in 
going to a developed country, because the cost differential is 
not that great. It is, I would argue, the major factor in going 
to a developing country. And again, an IRI study showed that 
the two biggest factors for going offshore anywhere, combined 
were: number one, lower cost talent, and number two, lower cost 
facility and materials.
    And I think one of the reasons why some studies have shown 
that access to talent is an important factor is akin somewhat 
to, and Mr. Chairman, you can appreciate this, I use the 
analogy, you are not going to have a lumber and wood products 
firm located in the desert. They have to locate where there is 
timber. And you are not going to have an R&D facility locate 
where there are no R&D scientists and engineers. So that is 
kind of the baseline. You have to have that. Once you have 
that, then the question of cost comes into play and, I think, 
plays a very important role. So China has a lot of skilled R&D 
engineers and scientists, as does India and the fact that the 
low cost is important.
    I would just add a point on incentives. I think incentives 
sometimes don't get picked up as much in the survey 
instruments, because they are not the driver, but the way firms 
make these decisions is they don't just look at incentives and 
then labor costs and facilities costs. They combine them all 
together into a cost estimate. When you do that, I actually 
think incentives play an important role.
    The U.S., for example, was number one in 1990, had the most 
generous research and development tax credit of any of the OECD 
nations, the 30 OECD nations. In 2005, we were 17th most 
generous, and that is partly because our credit has gone down, 
mostly because other countries have looked at this, and said we 
want to be an attractive location for R&D. We are going to put 
in place these incentives. So Mexico has a more generous 
incentive than we do. China has a very aggressive incentive. So 
does India.
    The last point on this, as Dr. Kenney mentioned, government 
pressure. I think forced technology transfer is an important 
issue, particularly in China, where the government pressures 
U.S. companies to get access to their market, to move R&D 
facilities over there. It is a direct violation of the WTO, and 
it is something that we don't really, frankly, as a country do 
very much about.
    Three quick things I think we can do. We recently issued 
two reports on the R&D tax credit, the first one showing, I 
think, very clear economic studies showing it is an effective 
tax tool. We think we need to significantly increase the 
credit, and I would be happy to share that report with you.
    Our specific recommendation is that we need to do more on 
supporting R&D at the federal level. The America COMPETES Act 
went a long way towards that. We have got a new report coming 
out, proposing the creation of a National Innovation 
Foundation.
    Third, while skills, I think, are not the driver, it is 
important that we have good skills here. And we need to do that 
at two levels. One is domestically, so again, the America 
COMPETES Act, it took important steps there, but also in terms 
of making sure that we are open towards the best and the 
brightest from the rest of the world coming, including H-1B 
visas, and letting people with a graduate degree stay here.
    And lastly, and I think it is again, an area we haven't 
looked at enough, but we need to more aggressively combat these 
foreign practices. I don't think there is a problem with 
countries investing in science or skills or R&D credit. It is 
very different, though, when they use unfair practices to force 
U.S. companies to put R&D there. I would argue our trade policy 
hasn't done enough there, and that is something that we should 
do more of.
    So thank you very much.
    [The prepared statement of Dr. Atkinson follows:]
                Prepared Statement of Robert D. Atkinson
    Mr. Chairman, Mr. Gingrey, and Members of the Committee, I 
appreciate the opportunity to appear before you today to discuss the 
issue of globalization of R&D and the factors that influence the 
location of U.S. R&D investments.
    I am President of the Information Technology and Innovation 
Foundation. ITIF is a nonpartisan research and educational institute 
whose mission is to formulate and promote public policies to advance 
technological innovation and productivity. Recognizing the vital role 
of technology in ensuring American prosperity, ITIF focuses on 
innovation, productivity, and digital economy issues. I have studied 
and written extensively about the issues of offshoring, U.S. technology 
competitiveness, and the location decisions of technology-based firms.

How Much R&D Is Being Offshored?

    Until recently corporate R&D was generally not very mobile, 
certainly not in comparison to manufacturing. But in a ``flat world'' 
companies can increasingly locate R&D activities anywhere skilled 
researchers are located. Estimating the current and future magnitude of 
R&D offshoring, however, is difficult, in part because it is a 
relatively new process that is undergoing significant change.[1] 
Indeed, while the internationalization of R&D activities by U.S. 
multinational firms has been a growing phenomenon for the last two 
decades, the process appears to have accelerated in the last decade and 
shifted its locational focus from Western Europe to some lower cost 
nations, including Eastern Europe and Russia, China, and India. For 
example, most of the over 700 independent foreign R&D facilities in 
China have been established since 2000.[2] Eight of the top ten R&D-
spending companies in the world have established R&D facilities in 
China.[3]
    Yet, notwithstanding the newness of these trends, the evidence is 
fairly conclusive that R&D offshoring is increasing substantially. In 
the last decade the share of U.S. firms' R&D sites located in the 
United States declined from 59 percent to 52 percent, while the share 
in China and India increased from eight to 18 percent.[4] According to 
a recent survey of U.S. R&D managers, over 60 percent of U.S. companies 
surveyed are investing in R&D in China, 50 percent in India, and 20 
percent in Eastern Europe. Although 65 percent of U.S. companies are 
increasing their R&D investments in Asia, just 29 percent are doing so 
in higher-cost Western Europe--the traditional destination for U.S. 
corporate R&D.[5] From 1994 to 2003, R&D performed by U.S. firms 
outside the United States increased significantly in low-wage nations 
like Mexico, China, and Malaysia, and also in mid-wage nations like 
Ireland, Israel, and Singapore (see Figure 1).
    But it's not just large multinational firms that are offshoring 
R&D; small and mid-sized technology firms are as well. One study of 
California-based technology firms (80 percent of which had less than 
500 employees) found that R&D was actually the most common activity 
offshored, with around 60 percent of firms reporting that they offshore 
R&D, which is about twice the rate of manufacturing offshoring and 
three times the rate of back office offshoring.[6]




    Moreover, not only are U.S. firms offshoring more R&D, but European 
and Japanese firms are as well. As Figure 2 demonstrates, the 
percentage of R&D conducted outside firms' home countries increased 
throughout the 1990s, even before the rapid increase in R&D offshoring 
to developing nations after 2000. The United Nations Conference on 
Trade and Development (UNCTAD) reports that of 1,773 greenfield R&D 
projects set up between 2002 and 2004, projects in developing nations 
by companies based in developed countries accounted for over half (953) 
of total projects, 70 percent of which were in China and India.[8]




The Effects on Domestic R&D

    There is considerable disagreement about the effect within the 
United States of these trends in R&D investments. It is certainly 
possible that offshoring of U.S. R&D will not affect the growth rate of 
R&D in the United States. If firms in most other nations are also 
globalizing their R&D they might in turn expand their R&D investments 
in the United States. To some extent this has happened, as 
multinational firms around the world have offshored a growing share of 
their R&D, some of it has come to the United States. But on net, 
however, it appears that in recent years more R&D has been offshored 
from the United States than has been insourced to us. One indicator of 
this trend is the fact that, between 1998 and 2003, investment in R&D 
by U.S. majority-owned affiliates increased twice as fast overseas as 
did total corporate R&D (U.S. firm and foreign firm) in the United 
States (52 percent vs. 26 percent).[10]
    It's also possible that the expansion of offshored R&D by U.S. 
firms has no detrimental effect on the amount of their domestic R&D 
investments. U.S. firms that take advantage of lower cost R&D abroad 
may simply be expanding their overall R&D beyond what they would have 
done otherwise. However, it appears that this is not the case. 
Corporate-funded R&D as a share of GDP fell by seven percent in the 
United States from 1999 to 2003, while in Europe it grew by three 
percent and in Japan by nine percent and even faster growth rates in 
China and India. From 2005 to 2007, R&D investment in the U.S. 
increased by 4.9 percent (PPP constant dollars) but increased in the 
rest of the world by almost twice that rate (8.7 percent).[11] 
Moreover, U.S. share of global R&D fell from 46 percent in 1986 to 37 
percent in 2003.[12] Overall, while investments in R&D as a share of 
GDP actually fell for the United States from 1992 to 2002, they 
increased in most other nations, including Japan, Ireland, Canada, 
Korea, Sweden, China, and Israel. (See Figure 3.)




    As the macro-level R&D investment data point to the substitution of 
foreign R&D for domestic, or at minimum to the fact that foreign R&D 
comes at the expense of a more robust expansion of domestic R&D. Survey 
data suggests similar conclusions. A survey of corporate research 
managers conducted by the Industrial Research Institute (IRI), the 
leading professional organization for corporate R&D managers, concluded 
that, ``It is not surprising that two of the interrelated changes most 
often noted with respect to the effect on domestic [R&D] operations 
[from expansion of offshored R&D] are (1) a reduction in staff levels 
in domestic facilities, and (2) a reduction in domestic funding of 
R&D.''[14] Indeed, IRI found that 52 percent of respondents reported 
that offshored R&D led to reductions in domestic R&D spending or staff, 
with just 13 percent reporting that it led to increased U.S. staff (see 
Figure 4). Likewise, a 2005 survey of multinational firms conducted for 
the National Academy of Sciences found that 15 respondents expect to 
increase R&D employment in the United States over the next three years, 
whereas 23 expected a decrease. Almost 70 respondents expected an 
increase in R&D employment in China and over 40 in India, with no 
respondent expecting a decline in these countries.[15]




What Is Driving the Movement of R&D Offshore?

    There appear to be a number of factors driving increased R&D 
offshoring. First, technology has made it possible for more work to be 
done at a distance. Researchers can be in close contact with others 
around the world through e-mail, the Internet, and video 
teleconferencing. Second, other nations have woken up to the 
opportunities of attracting internationally mobile investment, 
including R&D facilities. Many developing nations have established the 
infrastructure, skilled workforce and business climate to become 
attractive locations for this kind of work. Indeed, many foreign 
governments, and their sub-national governmental units, are 
implementing exactly the same kinds of economic strategies that U.S. 
states have long practiced, including providing direct grants and tax 
waivers for establishing R&D facilities.
    Most researchers agree that there are a number of motivations for 
U.S. firms to offshore R&D, including access to local markets, access 
to talent, and cost reduction. There is less consensus on which factors 
are the most important. Because R&D offshoring, particularly to 
developing nations such as China, India, and Russia, is new, there is 
relatively little research on the subject. However, some research has 
been done, but it yields conflicting answers. In part this is because 
the reasons firms offshore R&D vary according to a number of different 
factors, including the location, the type of R&D (e.g., more routine 
product development vs. more exploratory basic research), and the 
organizational form (in existing facilities; establishment of 
facilities that are specifically developed for the purpose of 
conducting R&D; or contracting with independent organizations for R&D). 
Moreover, the motivation for conducting R&D in other nations is 
changing. Traditionally, much overseas R&D was conducted to adapt 
products to foreign markets.[17] However, in the last decade, an 
increasing share of offshored R&D has been for the purpose of 
developing technology that can be used in the firm's global markets.
    So what factors are most important in offshoring R&D from the 
United States? As might be expected, costs do not appear to be the 
driving factor for offshoring R&D to other developed nations. After 
all, R&D costs are generally not lower in Western Europe and Japan. 
There, factors such as access to markets, linkages to existing 
production facilities, and access to talent are the most important 
factors.
    However, when it comes to offshoring to developing nations, it 
appears that cost reduction is the major driver. Indeed, this is what 
we would expect, given that salaries for R&D personnel in a nation like 
China are as low as one-sixth of those in the United States. In India 
the annual salary of an electronic circuit designer with a Master's 
degree and five years of experience is about $18,000, compared to 
$84,000 in the United States. Moreover, Indian engineers work about 450 
hours a year more than their U.S. counterparts.[18]
    A number of studies and surveys point to costs as the main driver. 
Booz Allen Hamilton found that when it comes to moving R&D to 
developing nations, access to a ``low cost skills base'' is a key 
driver for establishing new R&D sites.[19] A survey by the Industrial 
Research Institute agreed, finding that cost reduction is the most 
important factor in the decision to offshore R&D, with almost 39 
percent of U.S. corporate respondents citing it as their most important 
consideration. Moreover, another 31 percent cited increased 
competitiveness, which could include cost reduction factors. When asked 
to assess the importance of individual factors important to the 
decision to offshore, lower cost S&E talent and lower cost facilities/
materials were the two most important factors (see Figure 5).




    A survey of California technology companies found a similar 
pattern. For foreign outsourcing (unaffiliated offshoring), cost 
reduction was the most important factor. For affiliated offshoring, 
costs and access to skilled labor were both important.[21] It appears 
that these factors are at work in other nations as well. A survey of 
Danish firms found that cost reduction was the major factor leading 
them to offshore R&D.[22]
    While most studies cite cost reduction as the most important driver 
in the decision to offshore R&D, particularly to developing nations, 
one widely cited and reported survey by Thursby and Thursby conducted 
for the National Academy of Sciences concluded that market growth 
potential and availability of skilled R&D workers, and not cost, are 
the top two factors that drive multinationals to offshore R&D to other 
nations.[23] Yet, there are several reasons to believe that this 
research study significantly underestimates the importance of cost. 
First, the study shows that low costs are more important to the 
location decisions for emerging countries than developed nations or 
relocation in the home nation. Second, the study asks firms to assess 
the importance of tax breaks and costs separately. But when making 
location decisions most firms consider these factors together. If the 
survey instrument had instead asked respondents to assess the 
importance of total costs, including tax breaks, it is likely that 
costs would have been reported as a more important driver.
    Finally, and perhaps most importantly, it is not clear that 
availability of skills is the major driver of R&D offshoring. It seems 
more accurate to view the availability of R&D talent as a basic 
requirement of a site in order to be considered, but not a driver per 
se. In other words, firms will not move an R&D facility to a location 
where there is no technical talent, any more than a lumber and wood 
products firm would move to a region where there are no trees. Access 
to talent, as well as other basic necessities like electricity, water 
and telephone, is a requirement. Places with little or no access to 
these factors are simply not in the running. It doesn't matter how 
cheap the labor is or how big the incentives are, if a place doesn't 
have skilled researchers, R&D facilities will not locate there. So in a 
narrow sense, respondents may cite the availability of skills as an 
important factor. However, this is very different than saying that the 
availability of technical skills is the driver of the decision to 
offshore R&D. This is not to deny that sometimes firms locate R&D in 
particular regions because there is a concentration of particular types 
of scientific and technical talent there. But it's not clear that the 
major driver of firms going to China or India is the availability of 
skills.
    Given that costs are the most important driver in offshoring R&D, 
particularly to developing nations, what role do incentives play? Costs 
are determined both by overall costs of doing business and by specific 
incentives. Generally, incentives are not listed as the most important 
factor in determining R&D location decisions. However, because they do 
contribute to the overall cost estimation firms undertake, they are a 
factor involved in decision-making. This is one reason why within the 
last decade many nations, including most of Southeast Asia and Europe, 
have made attracting and growing R&D a centerpiece of their national 
economic strategies. Their aggressive use of R&D tax incentives is just 
one indicator of that commitment. In 1990, the United States enjoyed 
the distinction of having the world's most generous tax treatment for 
research and development. However, because the generosity of the credit 
has been whittled away over the years, and other nations have forged 
ahead, by 2004 we had dropped to 17th most generous (see Figure 6).[24] 
For example, China provides a 150 percent deduction on R&D expenses 
(provided that R&D spending increased 10 percent over the prior year). 
Mexico offers a tax credit of 30 percent not only for all R&D expenses 
but also for equipment (which is not eligible for the credit in the 
United States). India provides a tax deduction of 125 percent of 
certain R&D expenses.[25] But nations use more targeted incentives as 
well. For example, China has established a large number of research 
parks and many advertise tax breaks for foreign companies locating 
there. Other R&D incentives include tax breaks on R&D labor, exemption 
from VAT taxes on equipment purchases, and subsidized research 
facilities.[26]
    Many nations aggressively market their R&D tax policies to attract 
global research investments. Australia touts its generous R&D tax 
incentives in order to persuade multinational companies to invest 
there.[27] Ireland places ads in U.S. business magazines to market its 
attractiveness as a location for R&D facilities.[28] Not surprisingly 
the growth rate of R&D of U.S. foreign affiliates was higher in 
countries with tax-based R&D incentives than those without.[29]




    There is one other factor that may lead firms to offshore R&D. In 
some nations, pressure from the national government for ``technology 
transfer'' have led some firms to establish R&D facilities there, in 
order to be able to access the domestic market to sell goods and 
services.[31] For example, China sometimes requires companies to 
establish a research institution, center, or lab for joint R&D in order 
to get approval for joint ventures. Since the WTO prohibits forced 
technology transfer, nations that have joined the WTO have discovered 
that they can avoid a WTO violation by ``encouraging'' technology 
transfer without formally requiring it. One way is for local government 
officials reviewing investment applications to make it clear that a 
quid-pro-quo deal is required for approval. Burying these deals in the 
fog of bureaucracy lets ``mercantilist'' countries hide their WTO 
violations that bring in more offshored R&D than they would otherwise 
receive.

Is R&D Offshoring Good or Bad for the U.S. Economy?

    Not only is the extent and cause of R&D offshoring debated, so too 
is whether it is good or bad for the U.S. economy. There is a general 
consensus that R&D offshoring is beneficial to U.S. firms. Otherwise, 
why would they engage in it? Nonetheless, it is important to note that 
unless firms manage this process effectively, it's possible that they 
could lose valuable intellectual property to competitors. This could 
happen if other companies are able to gain access to the knowledge and 
then commercialize in direct competition. R&D offshoring could also 
benefits the U.S. economy if U.S. firms end up doing more R&D because 
of offshoring and are able to be more innovative and competitive than 
their rivals in other nations.
    Yet, offsetting these potential gains are the potential losses to 
the U.S. economy of the direct and indirect economic activity related 
to R&D. There is no doubt that while offshoring, like trade in general, 
benefits the United States by lowering prices on a wide array of 
services, it is also true that it threatens particular workers and 
communities. It is hard to make a strong case that losing low-wage jobs 
to offshoring hurts the U.S. economy, since many laid-off workers are 
likely to move up to higher wage, higher-skilled jobs, especially if 
they receive the necessary support and retraining. However, if the jobs 
are higher wage--as are R&D jobs--then it is less clear how offshoring 
these jobs benefits the economy. It is unlikely that most of the laid 
off workers, or the workers not hired because the firm did not expand 
R&D in the United States, would find jobs at comparable incomes.
    Moreover, the decline or otherwise slower growth of R&D investments 
is likely to mean fewer (or slower growth in) jobs for scientists and 
engineers.[32] This in turn could lead to fewer individuals choosing 
science, technology, engineering and math (STEM) careers, thereby 
exacerbating the trend toward more offshoring of R&D, until a new lower 
equilibrium is established. Moreover, R&D jobs appear to be linked to 
production jobs. Indeed, there is a correlation between a nation's 
investment in R&D and the share of its total manufacturing exports that 
are high-tech.[33] As a result, offshored R&D could lead to less high-
tech production.
    Finally, there is considerable evidence that R&D activities 
generate positive spillovers and that these spillovers are 
geographically limited in scope.[34] For example, there is evidence 
that offshored R&D spurs domestic companies in the receiving nations to 
increase their R&D, thereby increasing the competitive challenge to 
U.S. firms.[35] This is one of the reasons for the renewed interest 
around the world in regional ``clusters'' of economic activity, 
particularly innovation-based economic activity. As a result, losing 
R&D means more than the loss of the actual R&D activities.

What Should Congress Do?

    Congress has a key role to play in responding to this new challenge 
to the innovative position of the U.S. economy. However, one role it 
should not play is engaging in a debate about whether U.S. companies 
``should'' be offshoring R&D or whether CEO's that offshore R&D are 
``Benedict Arnolds.''[36] In the new global economy with hyper-
competitive product and financial markets, companies that do not take 
advantage of appropriate offshore R&D opportunities will suffer in the 
marketplace and in equity markets. But going to the other extreme and 
doing little in response, hoping that ``the market'' will solve the 
problem is likely to be equally as unproductive.
    Rather, Congress should focus on adopting the kinds of policies 
that will make the United States a place where companies--U.S. and 
foreign--want to increase their R&D investments. Making the environment 
and ``ecosystem'' for R&D the most vibrant and attractive in the world 
is a goal everyone should be able to agree on. There are four key steps 
Congress should consider:

 Expand the R&D tax credit: Perhaps the most straightforward 
and effective way to make the United States more attractive to 
internationally mobile R&D investment is to expand the R&D credit. 
Congress could start by doubling the credit's rate to 40 percent.[37] 
Doubling the credit would make an important statement that the United 
States is serious about keeping and growing research-based economic 
activities. In addition, Congress should also expand the Alternative 
Simplified Credit. Moreover, in order to spur more research 
partnerships between companies and American universities and federal 
laboratories, Congress should allow firms to take a flat credit of 40 
percent for collaborative research conducted at universities, federal 
laboratories, and research consortia.

 Create a National Innovation Foundation: The Federal 
Government's traditional focus on basic science (principally through 
the National Science Foundation), agency-specific mission-oriented 
research, and managing a patent system is no longer sufficient to 
ensure that the United States remains the world leader in R&D and 
innovation. If the United States is going to meet the economic 
challenges of the future, the Federal Government will need to make the 
promotion of innovation a larger part of its national economic policy 
framework. Congress took an important step in that direction with the 
passage of the 2007 America COMPETES Act. But the challenge is neither 
modest nor fleeting and more needs to be done.

    Other nations have come to that conclusion. In recent years many 
nations, including Finland, France, Iceland, Ireland, Japan, the 
Netherlands, New Zealand, Norway, South Korea, Sweden, Switzerland, and 
the United Kingdom have either established or significantly expanded 
separate technology- and innovation-promotion agencies. They realized 
that if they were to prosper in the highly competitive, technology-
driven global economy they needed specifically to promote technological 
innovation, particularly in small and mid-sized firms and in firms in 
partnership with universities.
    It is time for the United States to do the same and create and fund 
a new National Innovation Foundation (NIF), with a core mission to 
boost innovation in businesses.[38] The NIF would work with businesses, 
State governments, universities, and other partners to help spur 
innovation. The NIF would operate a competitive Industry Research 
Alliance Challenge Grant program to match funding from consortia of 
businesses, businesses and universities, or businesses and national 
labs. The NIF would also operate a competitive grant program to 
increase state investments in innovation-based economic development 
activities. States would submit proposals to the NIF laying out their 
technology-based economic development (TBED) strategies and explaining 
how NIF support would enable them to do more and better. Qualifying 
projects would include a host of TBED activities, including technology 
commercialization centers, industry-university research centers, 
regional cluster development programs, regional skills alliances, and 
entrepreneurial support programs.

 Ensure an Adequate Supply of Skilled Researchers: While costs 
are a key driver in offshoring to developing nations, ensuring an 
adequate supply of STEM talent is an important factor in helping ensure 
that companies conduct more R&D in the United States. For if companies 
have difficulty in hiring skilled STEM workers, it will be that much 
more of a spur to look overseas. As a result, we need to not only work 
to expand the domestic supply of STEM talent but also expand the 
opportunities for talented foreigners to come to the United States and 
contribute their expertise. Congress took several steps toward the 
first goal in the recent America COMPETE Act, but these efforts need to 
be expanded and fully funded, including providing more funding for 
specialty math and high schools.[39]
    But even with these efforts, it's important to note that at least 
for the short term, we won't be able to rely only on domestic supply 
alone. Policy-makers around the world are also waking up to the fact 
that a key component of increasing domestic R&D is expanding the supply 
of individuals with STEM degrees. Yet at a time when many other nations 
are making it easier for talented immigrants to enter their country, 
either as students or workers, the United States is struggling to 
decide what to do.[40] We have sent out mixed messages to the rest of 
the world since September 11, 2001, and in the immigration debate of 
the past year, pragmatic discussion of skills was drowned out by heated 
rhetoric about other aspects of immigration. As a result, Congress 
should expand and reform the H-1B visa program. In particular, tighter 
oversight of the program may be required to ensure that employers, 
particularly foreign ones, are paying prevailing wages. Finally, 
immigration policy should make it easier for foreign students studying 
in STEM fields to attend school here and to gain a path to citizenship 
once they obtain their graduate degrees.

 More Vigorously Combat other Nations' Efforts to Force U.S. 
Companies to Move R&D Offshore: As noted above, some nations tie access 
to their markets to company investments in R&D in their nation. Even 
though these practices violate the letter or spirit of the WTO, they 
are popular tactics with some mercantilist countries to gain valuable 
technological know-how. Yet, it is one thing if a company wants to 
invest in R&D in other nations as part of its business strategy. It is 
quite another for it to be coerced into doing so in order to gain 
access to the market. The United States government, and in particular 
the United States Trade Representative (USTR), needs to be much more 
proactive in fighting these kind of high-tech mercantilist actions and 
ensure that governments do not pressure U.S. firms to move R&D 
offshore.

Conclusion

    The U.S. economy still possesses enormous strengths and advantages 
in technology and innovation. However, the rise of offshore R&D 
threatens our technology leadership, particularly as there are few 
signs that, absent new public policies, this trend is not likely to 
abate any time soon. Ensuring continued technology leadership will 
require bold new policies to spur domestic R&D and innovation.

Notes:

 1.  Robert D. Atkinson, ``Apocalypse Soon? Why Alan Blinder Gets it 
Wrong on Offshoring,'' (Washington, D.C.: The Information Technology 
and Innovation Foundation, 2006), .

 2.  Yifei Sun, Debin Du, and Li Huang, ``Foreign R&D in Developing 
Countries: Empirical Evidence from Shanghai, China,'' The China Review 
6.1 (Spring, 2006), 67-91.

 3.  Magnus Karlsson, ``International R&D Trends and Drivers,'' The 
Internationalization of Corporate R&D, ed. M. Karlsson, (Ostersund, 
Sweden: Swedish Institute for Growth Policy Studies, 2006), 55-88; 
.

 4.  Booz Allen Hamilton and INSEAD, ``Innovation: Is Global the Way 
Forward?'' (2006): 3. .

 5.  ``2007 Global R&D Report: Changes in the R&D Community,'' R&D 
Magazine, (Battelle, Sep. 2006), 4; .

 6.  Ashok D. Bardhan and Dwight M. Jaffee, ``Innovation, R&D and 
Offshoring,'' paper 1005 (Berkeley: Fisher Center for Real Estate & 
Urban Economics, 2005); .

 7.  U.S. Bureau of Economic Analysis.

 8.  World Investment Report 2005 (New York: United Nations Conference 
on Trade and Development, 2006) .

 9.  Dan Breznitz, Innovation and the State: Political Choice and 
Strategies for Growth in Israel, Taiwan, and Ireland (New Haven: Yale 
University Press, 2007), 22.

10.  Majority-owned foreign affiliates (MOFA), which are foreign 
business enterprises that are owned at least 50 percent by U.S. 
parent(s). Source, U.S. Bureau of Economic Analysis.

11.  ``2007 Global R&D Report: Changes in the R&D Community,'' R&D 
Magazine (Battelle, Sep. 2006), .

12.  Council on Competitiveness, Competitiveness Index (Washington: 
Council on Competitiveness, 2007), 67.

13.  OCED S&T and industry outlook, 2004.

14.  R&D Magazine, op. cit., p. G15; .

15.  Jerry Thursby and Marie Thursby, Here or There: A Survey of 
Factors in Multinational R&D Location (Washington, D.C.: National 
Academy of Sciences, 2006), 12.

16.  R&D Magazine, op. cit.m p. G15; .

17.  Richard Florida, ``The Globalization of R&D: Results of a Survey 
of Foreign-Affiliated R&D Laboratories in the USA,'' Research Policy 
26.1 (1997), 85-103.

18.  Raja M. Mitra, ``India's Potential as a Global R&D Power,'' The 
Internationalization of Corporate R&D, ed. M. Karlsson, (Ostersund, 
Sweden: Swedish Institute for Growth Policy Studies, 2006), 267-306; 
.

19.  Booz Allen Hamilton and INSEAD, op. cit.

20.  R&D Magazine (Battelle, Sep. 2006): G16; .

21.  Bardhan and Jaffee, op. cit.

22.  Peter Maskell, Torben Pedersen, Bent Petersen, and Jens Dick-
Neilsen, ``Learning Paths to Offshore Outsourcing--From Cost Reduction 
to Knowledge Seeking,'' DRUID Working Papers 05-17 (Copenhagen: 
Copenhagen Business School, 2005).

23.  Thursby and Thursby, op. cit.

24.  Jacek Warda, ``Tax Treatment of Investment in Intellectual Assets: 
An International Comparison,'' OECD Science, Technology and Industry 
Working Papers 4 (Paris: OECD, 2006).

25.  Anthony B. Billings, ``Are U.S. Tax Incentives for Corporate R&D 
Likely to Motivate American Firms to Perform Research Abroad?'' Tax 
Executive (Jul. 2003).

26.  For example, see .

27.  Australian Government Department of Foreign Affairs and Trade, 
``Australia Now: Investing in Australia,'' .

28.  Business Week, 28 Aug. 2004.

29.  Billings, op. cit.

30.  OECD data including Jacek Warda, op. cit.

31.  Julie A. Hedlund and Robert D. Atkinson , ``The Rise of the New 
Mercantilists: Unfair Trade Practices in the Innovation Economy,'' 
(Washington, D.C.: The Information Technology and Innovation 
Foundation, 2007), .

32.  Robert D. Atkinson, ``Will We Build It and If We Do Will They 
Come: Is the U.S. Policy Response to the Competitiveness Challenge 
Adequate to the Task?'' (Washington, DC: The Information Technology and 
Innovation Foundation, May 2006), .

33.  Karolina Ekholm and Katerina Hakkala, ``Location of R&D and High-
Tech Production by Vertically Integrated Multinationals,'' The Economic 
Journal 117 (Mar., 2007), 512-543.

34.  Adam B. Jaffe, Manuel Trajtenberg and Rebecca Henderson, 
``Geographic Localization of Knowledge Spillovers as Evidenced by 
Patent Citations,'' The Quarterly Journal of Economics 108.3 (Aug. 
1993), 577-98.

35.  Zhe Qu, Can Huang, Mingqian Zhang, and Yanyun Zhao, ``R&D 
Offshoring and Technology Learning in Emerging Economies: Firm Level 
Evidence from the ICT Industry,'' UNU-MERIT Working Paper Series 023 
(United Nations University, Maastricht Economic and Social Research and 
Training Centre on Innovation and Technology, 2007).

36.  Jim VandeHei, ``Kerry Donors Include `Benedict Arnolds,' '' The 
Washington Post 26 Feb. 2004: A01; .

37.  The National Academy of Sciences' Rising Above the Gathering Storm 
report made a similar recommendation which was introduced into 
legislation by Senators Alexander (R-TN) and Bingaman (D-NM): Committee 
on Prospering in the Global Economy of the 21st Century, Rising Above 
the Gathering Storm: Energizing and Employing America for a Brighter 
Economic Future (Washington, D.C.: The National Academy of Sciences, 
The National Academy of Engineering, and the Institute of Medicine, 
2006); PACE--Finance Act, S. 2199.

38.  See Robert D. Atkinson and Howard Wial, ``Boosting Productivity, 
Innovation, and Growth through a National Innovation Foundation,'' 
(Washington, D.C.: The Information Technology & Innovation Foundation 
and the Brookings Institution, forthcoming).

39.  Robert D. Atkinson, Janet Hugo, Dennis Lundgren,. Martin J. 
Shapiro, and Jerald Thomas, ``Addressing the STEM Challenge by 
Expanding Specialty Math and Science High Schools, ``(Washington, D.C.: 
The Information Technology and Innovation Foundation, 2007), 
.

40.  David M. Hart, ``Global Flows of Talent: Benchmarking the United 
States,'' (Washington, D.C.: The Information Technology and Innovation 
Foundation, 2006), .

                    Biography for Robert D. Atkinson
    Robert Atkinson is President of the Information Technology and 
Innovation Foundation, a Washington, DC-based technology policy think 
tank. He is also author of the book, The Past and Future of America's 
Economy: Long Waves of Innovation that Power Cycles of Growth (Edward 
Elgar, 2005). He has an extensive background in technology policy, he 
has conducted ground-breaking research projects on technology and 
innovation, is a valued adviser to state and national policy-makers, 
and a popular speaker on innovation policy nationally and 
internationally.
    Before coming to ITIF, Dr. Atkinson was Vice President of the 
Progressive Policy Institute and Director of PPI's Technology & New 
Economy Project. While at PPI he wrote numerous research reports on 
technology and innovation policy, including on issues such as broadband 
telecommunications, Internet telephony, universal service, e-commerce, 
e-government, middleman opposition to e-commerce, privacy, copyright, 
RFID and smart cards, Internet telephony, the role of IT in homeland 
security, the R&D tax credit, offshoring, and growth economics.
    Previously Dr. Atkinson served as the first Executive Director of 
the Rhode Island Economic Policy Council, a public-private partnership 
including as members the Governor, legislative leaders, and corporate 
and labor leaders. As head of RIEPC, he was responsible for drafting a 
comprehensive economic strategic development plan for the state, 
developing a ten-point economic development plan, and working to 
successfully implement all ten proposals through the legislative and 
administrative branches. Prior to that he was Project Director at the 
former Congressional Office of Technology Assessment. While at OTA, he 
directed ``The Technological Reshaping of Metropolitan America,'' a 
seminal report examining the impact of the information technology 
revolution on America's urban areas.
    He is a board member or advisory council member of the Alliance for 
Public Technology, Information Policy Institute, Internet Education 
Foundation, NanoBusiness Alliance, NetChoice Coalition, the Pacific 
Institute for Workforce Innovation, and the University of Oregon 
Institute for Policy Research and Innovation. He also serves on the 
advisory panel to Americans for Computer Privacy, is an affiliated 
expert for the New Millennium Research Council, a member of the 
editorial board of the Journal of Electronic Government, a member of 
the Reason Foundation's Mobility Project Advisory Board, and a 
Nonresident Senior Fellow at the Brookings Institution. Dr. Atkinson 
was appointed by President Clinton to the Commission on Workers, 
Communities, and Economic Change in the New Economy. He is also a 
member of the Task Force on National Security in the Information Age, 
co-chaired by Markle Foundation President Zoe Baird and former Netscape 
Communications chairman James Barksdale. In 1999, he was featured in 
``Who's Who in America: Finance and Industry.'' In 2002, he was awarded 
the Wharton Infosys Business Transformation Award Silver Medal. In 
addition, Government Technology Magazine and the Center for Digital 
Government named him one of the 25 top ``Doers, Dreamers and Drivers of 
Information Technology.'' In 2006, Inc. Magazine listed Atkinson as one 
of ``19 Friends'' of small business in Washington. He received his 
Ph.D. in City and Regional Planning from the University of North 
Carolina at Chapel Hill in 1989.
    ITIF is a 501(c)(3) nonprofit organization founded in 2006. Created 
in partnership with the Information Technology Industry Council, it is 
governed by a board of distinguished IT and innovation policy leaders 
and experts.

    Chairman Wu. Thank you very much, Dr. Atkinson. Mr. Morris, 
please proceed.

    STATEMENT OF MR. STEVE MORRIS, EXECUTIVE DIRECTOR, OPEN 
     TECHNOLOGY BUSINESS CENTER (OTBC); MANAGING DIRECTOR, 
                       OREGONSTARTUPS.COM

    Mr. Morris. Thank you, Mr. Chairman, and thank you to the 
Committee for the opportunity to just talk before you today.
    I would like to, I guess, bring sort of a technology 
business background approach to this, and more recently, my 
focus really has been on startups, although I have been at 
larger companies, too. I would like to, I guess, talk about 
some of my observations, at least, as to what is important.
    Many of the factors that have already been talked about are 
clearly key in deciding where you are going to locate an R&D 
facility. If you don't have the workforce and the 
infrastructure that is required for that technology, it isn't 
going to happen. If you don't have IP protection, it is less 
likely to happen. If it is not an attractive place to recruit 
employees and retain employees, it makes it more difficult. 
Access to technology, if you don't have the universities, you 
don't have the strategic partners you want to work with, again, 
it is not as likely to happen. I guess, my thing would be you 
have to build on your strengths. We are not going to lead in 
every possible aspect of R&D. Not even the U.S. can do that. We 
can pick our battles, you know. What technologies are we strong 
in? Let us invest in the existing clusters in those areas best 
in the R&D universities in those areas.
    Certainly work on the K-12 system in this country, because 
that is important, not only for recruiting employees. Employees 
care about the education of their kids. But clearly, that 
creates the future workforce. But, I guess, the area I would 
like to talk about a little more, which is more uniquely my 
focus, is what I think is our big advantage, which is 
entrepreneurship and entrepreneurial innovation. That is a very 
strong thing for this country.
    It is relatively easy to start a company in the U.S. 
compared to other areas. Culturally, entrepreneurship is an 
okay thing to do. It is encouraged. It is not frowned upon, the 
way it is in some other countries, and a lot of innovations 
happen in this country, because of our entrepreneurial flair.
    I think there are some important things we can do to 
strengthen that, which will relate directly to attracting more 
R&D operations to this country. A couple of examples from 
Oregon, we have an IBM facility for open source software in 
Beaverton. The reason that is there is because they have bought 
a startup company called Sequent Computers, excuse me, in 
Beaverton, and that brought IBM to the area. They saw, then, 
that there was a great workforce, and a lot of other advantages 
for an open source software group. It ended up getting located 
there. That is an example where what started as a very small 
startup actually attracted a very large R&D organization into 
the area.
    A second example, more on the smaller end, because of our 
strength in entrepreneurship and because of our strengths in 
specific markets and technologies, we have an opportunity to 
attract more entrepreneurs to come to the U.S. from offshore to 
start their startups here.
    Again, a recent example in Oregon, a company called Lunarr, 
with two Rs, started by an entrepreneur from Japan, who had a 
very successful company there, sold it, came to the U.S. to 
start Lunarr, because number one, it is a Web 2.0 company, and 
he looked at the U.S. as being a better market, so we had an 
advantage there. Two, the strategic partners in Web 2.0, they 
were here. And number three, he found the workforce that he 
needed, which was hard to find in Japan. He decided on 
Portland, as opposed to California, mainly because of quality 
of life for his employees. So, now, yes, it is a small company, 
but of course, Google was a small company once, and clearly, 
that is the bet you make when you invest in startups is that 
some of them will be home runs.
    The third example I wanted to mention is something we are 
beginning to have success with at OTBC, the incubator in 
Beaverton for technology startups, where we have realized that 
small software, open source software companies in Japan, are 
having a hard time recruiting the engineers they need. We have 
explained to them that we have a lot of those things here, and 
we are making it very easy for small companies, who normally 
wouldn't be opening an R&D operation in the U.S. at this stage, 
say with 20 or 30 people. Well, as an incubator, we can make 
that very easy for them. So we just signed our first lease with 
a software company from Japan, to open up an R&D office at 
OTBC. We have got a verbal commitment from a second one, and I 
know of at least ten more companies that look like good 
prospects over the next one to two years. So, again, these are 
small, but they all have very good growth potential, and some 
of them will be growing into big companies.
    So I would really like to suggest that a part of a strategy 
for attracting R&D investments from big and small companies, 
the whole strategy really should include a focus on 
entrepreneurship, because it is such a strength, and there are 
some things we need to address to make that even stronger. Like 
a specific issue we have right now is the migration of venture 
capital to much later stage companies. It is very difficult 
these days to raise seed level money, absolutely something that 
could be improved with some government policies. So I would 
urge the Committee to consider those, more startup oriented 
packages. Some of them will grow to be big.
    Thank you very much.
    [The prepared statement of Mr. Morris follows:]
                  Prepared Statement of Steven Morris

Introduction

    As the Manager for an incubator for high-technology startups in 
Beaverton, Oregon, and a startup entrepreneur myself, much of my focus 
the past few years has been on startups and entrepreneurship, although 
in 25 years in high-technology business, I have worked for and with a 
number of very large technology companies. Below, I have tried to share 
with the Subcommittee my understanding of the major factors technology 
companies consider when deciding where to locate a Research and 
Development (R&D) facility.
    One theme in my remarks is ``build on your strengths.'' One of our 
strengths in the United States is that we are very good at innovation 
and entrepreneurship. The two frequently go hand-in-hand, with a new 
innovation (e.g., a new technology for more effective web searches) 
resulting in a startup (Google, for example) which grows into an 
industry leader.
    The Subcommittee's focus is probably on convincing larger 
technology companies in the U.S. to keep their R&D operations in the 
U.S. and on convincing larger foreign companies to locate their R&D 
operations here. I'd like to argue that the U.S. strengths in 
innovation and entrepreneurship are by themselves advantages in keeping 
and/or attracting R&D operations in the U.S.
    And, it's possible to leverage our innovation and entrepreneurship 
strengths to attract foreign entrepreneurs to open R&D operations here 
and even to start their companies here. I only have anecdotal evidence 
to offer--but we're seeing such relocations happen in Oregon. Some of 
those transplanted operations will grow into large, successful 
companies, yielding a very high return-on-investment for any 
governmental programs that facilitate the process. I believe that 
investing in our entrepreneurial strengths, and attracting startup-
level R&D operations should a key component of a U.S. R&D 
competitiveness strategy.

Factors

         What are the factors that influence companies when selecting 
        sites for facilities, especially for research and development? 
        Has competition for locating R&D intensive facilities 
        increased?

    There is a long list of factors that a high-technology company will 
consider in deciding on the location of a new R&D facility. In my 
experience, some of the more important factors are:

Workforce

    Human capital is the most critical resource for an R&D facility. 
Companies will consider locating an R&D facility in a region only if 
that region provides a highly educated workforce with expertise 
relevant to the type of R&D in question (or at least with a well 
educated, trainable workforce, and a location that is so attractive 
that the company is confident that they can recruit the specialized 
skills and knowledge that are required). This is certainly one good 
reason that states are beginning to adopt a ``cluster'' strategy of 
leveraging their existing strengths (or ``clusters'') of technologies. 
(I think of this as a ``build on your existing strengths'' strategy.) 
The existence of a cluster implies existence of a skilled workforce to 
support that cluster. And it also implies that other required 
infrastructure is already in place. . .

Availability of required infrastructure

    Although human capital is critical, there are often other aspects 
of infrastructure that must also be available to support R&D 
activities. A semiconductor facility, for example, requires access to a 
broad range of chemicals, machinery, analytical equipment, and very 
specific raw materials that are processed in particular ways by skilled 
vendors. For R&D work, there are advantages in having local vendors 
supplying infrastructure pieces so collaboration is easier. Working 
with a local vendor to make adjustments to equipment on make 
modifications to the way some chemical or component is processed is 
much easier if the vendor is across town rather than on the other side 
of the continent. (Even in a ``flat world,'' face-to-face teamwork 
still has problem-solving advantages!) Again, this is another reason 
for a ``cluster'' strategy.

Quality of Intellectual Property (IP) protection

    R&D might be defined as the process of creating technology-based 
intellectual property, or IP, so protecting that IP is extremely 
important. The U.S. has very strong IP protection laws, which reduces 
the likelihood that an employee will take IP learned at one company to 
a competing company. Not all countries have such strong protections. 
However, one key segment of the U.S. IP protection infrastructure is 
very bogged-down right now--and that is the patent process. Obtaining a 
patent can take (and usually does take) multiple years.

Attractiveness to Employees

    No R&D facility can rely exclusively on the workforce that is 
available locally. Growth and specialized needs will require recruiting 
employees from outside of the area. And, of course, it's important to 
retain the employees you have. That makes attractiveness of the R&D 
location to employees a very important factor. It's no surprise that 
this reduces to considerations such as:

         Quality of life

         Quality of K-12 school system (highly educated workers care
         about the education of their children)
         Cost of living

K-12 and University Education

    As suggested above, available of a high-quality K-12 education 
system is important for attracting and retaining employees. But a 
second reason that K-12 is important is that it is developing the 
company's long-term workforce. And availability of high-quality higher 
education options is important for employee development and retention. 
A highly-educated workforce needs access to ongoing educational 
opportunities. This is especially critical in an R&D workforce where 
technology skills must be continually improved and extended.

Access to technology

    In addition to having access to a highly-trained workforce, R&D 
operations benefit from access to university research that is relevant 
to their R&D and access to strategic partners that cooperate in or 
contribute to technology R&D.

Tax Climate and Tax/Financial Incentives

    These cover a wide range of possible strategies from property tax 
and income tax breaks to very good real estate deals, government-funded 
employee training programs, etc. All other things being equal, clearly 
the lower-cost location has significant advantages. However, if some of 
requirements mentioned above are not in place, then no level of 
financial or tax incentive will win the day.

Strategies

         What strategies have the City of Beaverton and Portland metro 
        area employed to try to attract companies to build facilities 
        there? Which strategies were successful, and which were not? 
        Why?

    For Beaverton, with relatively little land available for 
incorporation into the city, creating new office parks to accommodate a 
large corporate R&D center is simply not an option. So with respect to 
technology companies, Beaverton has focused on encouraging the 
formation of new companies, and helping existing companies grow. This 
dual strategy is reflected in two of the City's economic development 
tactics: creating a high-tech incubator and implementing an ``economic 
gardening'' program to help existing Beaverton companies grow. Of the 
two programs, the incubator (OTBC) is very relevant to attracting R&D 
operations to the U.S.
    OTBC provides office space and coaching/advising services to high-
tech startup companies to increase the odds of their success. The 
program is relatively new (we started adding startup in 2006) but is 
already starting to show results. For example, OTBC companies attracted 
$8 million in private (angel and venture capital) investments in the 
past three months--already showing a good return on the $1.3 million 
investment Beaverton made to kick off the program.
    The more relevant result for the Subcommittee is that OTBC is 
beginning to see success in attracting offshore startups to establish a 
U.S. R&D beachhead at the incubator. I discuss this in more detail in 
the next section.

The Importance of Entrepreneurial Innovation

    As I suggested earlier, I believe that entrepreneurial innovation 
and a healthy high-tech startup environment are significant U.S. 
strengths which are important to attracting R&D operations to the 
United States.
    There is considerable evidence as to the U.S. strength in 
entrepreneurship:




    As shown by the above charts, in the U.S., entrepreneurial 
expectations are high, and the regulatory environment makes it 
inexpensive and quick to start a venture.
    Oregon is particularly strong in entrepreneurship and new-venture 
creation. In 2005, Oregon was #7 of all states in the level of small 
business ownership, with 19.5 employer firms and self-employed 
individuals per 100 people in the labor force. (Source: U.S. Small 
Business Administration, Office of Advocacy, 2005, Small Business 
Economic Indicators.)
    One weakness in the U.S. entrepreneurship ecosystem is funding of 
early-stage (seed) companies. As venture capital funds have increased 
in size over the past decade, the total amount of venture capital 
available has grown significantly. But as fund size increases, venture 
capital firms have been forced to make larger investments in later 
stage companies. A $300M fund simply can't make small investments (say, 
under $1M or $2M) because they can't manage that many investments. This 
has created a funding gap for startups. Angel investors (high net worth 
individuals who invest in startup companies) are partially filling that 
gap with seed-level investments, but that is only a partial solution. 
This country's startup economy is in critical need of improved access 
to seed-stage capital.
    A strong entrepreneurship environment is important in attracting 
R&D operations for at least three reasons:

1.  One mechanism for attracting R&D relocation is through acquisition 
of a startup.

    Example: IBM now has an R&D facility in Beaverton. That came about 
because IBM purchased Sequent Corporation, a local startup and Intel 
spin-off. Having a presence and office space in Beaverton, IBM 
subsequently decided that because of the region's strength in open 
technologies, and Oregon's quality of life advantages, Beaverton made 
an excellent location for an IBM open-source software development 
operation. You can argue that acquisition of a U.S. startup by an 
offshore company is moving technology out of the U.S.--but if the 
company reinvests, building more local R&D infrastructure, then it's 
certainly a net win for the U.S.

2.  The U.S. can leverage the countries entrepreneurship advantages and 
strengths in specific high-tech markets to attract startups that might 
otherwise locate in their home countries.

    Example: Lunarr is a startup in Tigard, Oregon that was started by 
a successful Japanese entrepreneur. After one startup success in Japan, 
he decided to start Lunarr (a web 2.0 collaboration service) in the 
U.S. because it provided easier access to web 2.0 technologists and 
partners in the U.S., and because of U.S. is a good place to start and 
grow a business. He selected the Portland area (after considering 
several west-coast sites) primarily due to the high quality software-
engineering workforce, and the quality of life in Oregon.

3.  Entrepreneurship strengths, quality of life, and highly educated 
workforces can all be leveraged to attract R&D operations of offshore 
startup companies to the U.S. Although these companies are small, many 
of them have excellent growth potential, and a few will no doubt become 
``home runs'' generating considerable economic benefits.

    Example: In June of 2006, I visited Japan as part of a Governor 
Kulongoski trade mission. I met with four open-source startup companies 
in Japan. All four were having trouble recruiting the open source 
software engineers they needed. Oregon has a strong open source 
workforce, and OTBC provided an easy was for a small Japanese software 
company to start up an R&D operation in Beaverton (in the incubator 
world, this is called providing a ``soft landing'' for offshore 
companies). Since that trip, OTBC has signed a lease with one Japanese 
software company--Blueleaf--and received a verbal commitment from a 2nd 
Japanese software company to sign a lease by the end of the year. 
That's a 50 percent success rate! Both companies have the goal of 
recruiting open source software engineers, and building an R&D center 
in Beaverton.

    Building on this early success, I visited a major open source 
software exposition in Tokyo last June and met with 40 open source 
software companies, 10 of which look to be good prospects for opening 
an open source R&D operation in Oregon within the next one to two 
years.

    A strong entrepreneurship/startup ecosystem is also a factor in 
attracting a larger company's R&D operation. A strong entrepreneurial 
environment, combined with a highly educated workforce (as part of a 
technology cluster, so the workforce is trained in technology relevant 
to the company) combined with university technology and technology from 
other local (cluster) technology companies creates an energized 
environment that generates innovative technology spin-offs--often 
creating attractive acquisition targets for larger R&D operations. Even 
for a larger R&D operation, access to innovation is as important as 
access to technology.

Recommendations

         What types of incentives most influence companies searching 
        for a facility site? What recommendations would you provide to 
        the Federal Government to aid local governments working to make 
        their areas more attractive to companies?

IP protection: Streamline the Patent Process

    The U.S. likely has the most effective intellectual property 
protection in the world--but it can move very slowly. We need to speed 
the patent process. Five to six years to get a patent is simply too 
long in the fast-moving high-tech world. Either the process needs to be 
simplified, or more resources need to be applied.

Innovation and Entrepreneurship: Build on our strength--and merchandise 
                    it

    We can build on our strength in startup innovation by

         Investing in technology startup incubators and ``soft 
        landing'' programs

         Investing in University technology transfer programs

Improve the Seed-Level Investment Situation

    Countering the decrease in seed-level investment from the U.S. 
venture capital industry is critically important for maintaining a 
healthy entrepreneurial environment in the U.S. I would suggest:

        --  Reduce the capital gains tax for angel investments in early 
        stage startups

        --  Perhaps create a ``U.S. Innovation Accelerator'' fund (as a 
        time-limited experiment) that would add a 15 percent ``kicker'' 
        to angel investments between $50K and $250K. Such a kicker 
        would be a great help to entrepreneurs raising seed capital 
        from angel investors. Even something as small as a 15 percent 
        kicker would provide angels with significant leverage on their 
        investments. Not only would this improve the seed-level funding 
        environment, but managed correctly, it would make money. (The 
        fund would receive stock in the companies.) This is an 
        investment, not an expense!

Invest in University Research, but Choose the Right Technologies

    Not even the U.S. can be #1 in all areas of technology. We should 
proactively choose the technologies the U.S. intends to dominate, and 
invest in University research in those areas. Perhaps leverage existing 
state investments and state technology clusters by adding to or 
matching state investments in R&D (the States know best what clusters 
are their areas of strength.)

Tax incentives: Choose our battles

    As mentioned above for University research, the U.S. can be #1 in 
all areas of technology. We should proactively choose the technologies 
the U.S. intends to dominate, and create tax incentives targeting those 
areas.

Invest in K-12 Education

    This is critical for developing, recruiting, and retaining a 
quality workforce. We need to significantly improve science and math 
education in elementary, middle and high schools and also should start 
to teach students about innovation and invention before they go to 
college.

Immigration: we need Access to the International Talent Pool

    The U.S. educational system cannot supply all of the advanced 
degree professionals that U.S.-based R&D operations will need to 
employ. U.S. based operations--whether owned by U.S. firms or foreign 
firms--need to be able to recruit foreign workers. Security concerns 
have made it more difficult for people from abroad to attend U.S. 
university programs and join U.S. companies, just when rapid 
development in their own economies make it more attractive for them to 
return there. We need to make it easier for highly-educated foreign 
individuals to attend U.S. schools and work for U.S. firms.

Promote the Value of Quality of Life

    A major strength we have in Washington County and in Oregon in 
general is the exceptional quality of life. And while I'm a biased 
Oregonian, there are certainly many other parts of the country that 
offer excellent quality of life. This is an advantage we should 
promote. Any corporation considering a new location is interested in 
recruiting quality employees--and excellent quality of life makes that 
job much easier. So let's figure out how to market that!

                       Biography for Steve Morris
    Steve Morris is the Executive Director of OTBC and the Managing 
Director of OregonStartups.com. He has more than 25 years of management 
experience in the software, service, and semiconductor test industries 
at companies such as Hewlett Packard, Integrated Measurement Systems, 
Cadence Design Systems, Mentor Graphics, and Credence Corporation. 
Prior to joining OTBC, he founded OregonStartups.com, providing 
consulting and web-based advice and information or startup companies. 
He founded Teseda Corporation and served as CEO from 2001 to 2005, and 
prior to that founded two internal startups in larger companies. He has 
extensive experience in strategic marketing, business plan development, 
strategic partnerships, and venture capital fund raising. He holds a 
B.A. in mathematics from Reed College and a Masters of Science degree 
from Carnegie-Mellon University Graduate School of Industrial 
Administration(now The Tepper School of Business).

    Chairman Wu. Thank you very much, Steve. Mr. Sweeney, 
please proceed.

STATEMENT OF MR. MARK M. SWEENEY, FOUNDER, CO-OWNER AND SENIOR 
             PRINCIPAL, MCCALLUM SWEENEY CONSULTING

    Mr. Sweeney. Thank you, Mr. Chairman and the Committee. 
Pleased to be here today.
    I am going to speak to you from the trenches. My firm is a 
site selection firm. We help companies decide where to build 
their facilities, so we work with them directly on the types of 
location decisions this committee is interested in. Our firm 
does help all kinds of companies, from all over the world, look 
all over the world, and we do support all types of activities, 
office, including R&D, manufacturing, and distribution.
    The site selection process can be seen from a lot of 
different perspectives. Perhaps the most helpful is to see it 
as bringing geography issues into a company's capital 
investment decision. When a company sees an opportunity, 
whether it is for a new product or a new market, or demand for 
enhanced research and development or customer service, once 
they have that opportunity in front of them, they need to 
decide where, because where they do something has a very large 
impact on how successful they will be. The factors that go into 
the where question cover a lot of the same bases, but in their 
details, will be different for each type of project, for each 
type of company, and even change over the life of the decision.
    In the early stages of our projects, it is important for us 
to understand our clients' strategic drivers, what this 
investment is all about, what this opportunity is all about, as 
well as the operational drivers. What are the specific things 
associated with this project that are going to be impacted and 
different, depending on where they actually locate?
    In general, we examine three broad areas of factors: 
physical factors, operating factors, and living factors. 
Physical factors can include things like sites, buildings, and 
all types of infrastructure, and as you might imagine, the 
demands for those will vary greatly from project to project. 
Operating factors are factors that influence the decision and 
the location over the life of the project.
    A big component of that is labor, and all the issues that 
go into labor evaluations, availability, quality, cost, et 
cetera, utilities, utility effectiveness, reliability, and 
utility cost. For industrial projects, transportation is 
usually very important, and then, taxes and incentives are a 
factor in every site selection. On the living conditions side, 
that gets into quality-of-life issues. The community assets in 
a company, in a community, the housing market, medical 
services, the security of the company, and cultural and 
recreational assets. Again, the various weights on these 
factors will depend on the particular project, and on the stage 
of the project, but we generally deal with all of those factors 
on all projects.
    When we get to a final stage, the way we manage our 
projects, when we get to the final phase, having done both 
desktop and field work analysis on all the factors I mentioned, 
we will have finalists that are generally acceptable locations 
for our client's project. What that means is the final decision 
is being made being strong, viable candidates. Incentive 
negotiations tend to become most intense at the end of the 
project, and as a result, do have significant influence, 
because at that point, you are trying to make distinctions 
among viable locations, and incentives can help accentuate the 
strengths, mitigate the weaknesses, and sharpen the differences 
between your finalist locations.
    Now, for research and development facilities, let me back 
up a moment, projects at the very beginning can often be seen 
as, in a very broad sense, either being driven by site and 
physical factors, or being driven by people and human resource 
factors. Now, all of those factors get involved in all 
projects, but that is sort of where the general tone starts. 
Research and development projects will be people-driven 
projects. All of the factors are important, but perhaps, the 
primary most important factor is access to quality talent. That 
can be talent that is currently available in a location, but 
just as important, the ability to recruit and retain that 
talent into your candidate location. For R&D, that recruitment 
is going to take place on a global level, so your ability to 
attract talented people from around the world into your 
community is going to have a big influence on our final 
decision.
    You have heard a lot from my esteemed fellows here on the 
panel about the trends in research and development. Those 
offshore trends are impacting all types of activities. 
Countries have recognized that R&D is a great basis for future 
competitive economic activity, and by establishing advantages 
in R&D, they are positioning themselves not only to win that 
battle, but positioning to win future economic development 
battles as R&D efforts get commercialized.
    Countries outside of the obvious ones like China and India, 
countries like Singapore, and even our neighbors in North 
America, Canada and Mexico, have taken very aggressive stances 
to recruit research and development.
    In the U.S. there are some opportunities for us to re-
compete and reestablish our leadership. Some of those would 
include the big science project or the big vision, something 
along the lines of NASA that will not only energize the 
country, but create great types of research and potential 
spinoffs, and at the same time, hopefully energize younger 
Americans to find science and engineering career paths more 
attractive.
    In tax and finance policies, the U.S., as has been shown 
here, has fallen way behind on tax policy, and has very little, 
in terms of capital-oriented grants, and therefore, finds 
itself, even if it is competing as a finalist for a project, 
being outspent and out-incented in the final stages of a 
project. Legal issues include intellectual property rights. We 
have a strong patent system. It makes it easy to get patents, 
but it is difficult to move that out into commercialization by 
other firms.
    Growing and retaining an entrepreneurial base, which is 
what takes R&D activities and bridges it to commercialization. 
There is a lot of efforts there. Those can be improved 
considerably.
    And then, finally, an area where the U.S. has a natural 
advantage is that a lot of companies in advanced manufacturing 
would like their research and development to be in relatively 
close proximity to their key, cutting edge manufacturing 
locations. They would like to put R&D in this country, but when 
you can do it in a neighboring country, or a different country 
around the world for a fraction of the cost, that overcomes the 
natural tendency to be close. So, there is some low hanging 
fruit that the U.S. could grab to help stem this tide of R&D, 
but it is a wide range of policies that would take that.
    Thank you.
    [The prepared statement of Mr. Sweeney follows:]
                 Prepared Statement of Mark M. Sweeney
    Thank you for the opportunity to testify before your subcommittee 
at the hearing entitled ``The Globalization of R&D and Innovation, Part 
III: How Do Companies Choose Where to Build R&D Facilities?''

Introduction

    I am a founder, co-owner and Senior Principal with the firm 
McCallum Sweeney Consulting, Inc. (MSC) of Greenville, SC. We are a 
site selection consulting firm; we help companies decide where to build 
their new facilities. We help companies from all over the world look 
all over the world, although the vast majority of our search activity 
is in North America. We help all types of companies with all types of 
projects, including headquarters, back office, research & development, 
manufacturing and logistics/distribution. Additional information about 
our company, our services and our recent clients can be found at our 
web site: www.mccallumsweeney.com.
    Site selection can be seen from many perspectives, but it perhaps 
most clearly seen as bringing geography to the capital investment 
decisions of companies. Companies identify an opportunity--it may be 
for a new product, or new markets, or for increased R&D, or to meet 
growing customer service demands. Whatever the opportunity or need may 
be, a lot goes into the decision to spend capital to establish and 
operate a new facility. One important question in this decision is 
``Where?'' Many of the factors that are important to a facility project 
will be different in different locations, so where a company decides to 
build and operate impacts the success of the investment and enterprise.

The Site Selection Process

    The approach our firm takes with clients is a rational, phased 
approach. It starts with understanding the company's investment project 
and its strategic and operational drivers. These will vary with each 
project by project type (e.g., R&D vs. manufacturing). From these 
indicators we will help the firm establish a search region. For 
industrial projects, this is typically a contiguous region defined 
largely by in-bound and out-bound transportation costs. For office-
oriented projects, the search ``region'' may be a discreet set of 
locations typically defined by key labor characteristics. The search 
region is screened against various statistics that measure the project 
decision criteria, using geographic information systems (GIS data). 
This determines our Areas of Interest. These are further investigated 
to narrow the search to a set of Candidate Communities.
    Candidate Communities have met the basic needs of the project and 
will be the focus of field investigations. In the field we thoroughly 
investigate Physical Conditions (sites, buildings, infrastructure), 
Operating Conditions (labor, utilities, transportation, taxes), and 
Living Conditions (quality of life issues including community assets, 
housing, medical, education, security, cultural and recreational 
assets, etc.). After considerable comparative analysis, this phase 
concludes with selection of Finalist Communities.
    For MSC, only locations that are viable will move to the Finalist 
group. The Finalists will likely present different strengths and 
weaknesses but will all be understood at that point to be locations in 
which the project could operate successfully. The final phase is final 
due diligence on key factors (sites, labor markets, etc.) as well as 
final negotiations, including incentive negotiations. Detailed 
financial modeling is completed as well as final risk assessments, and 
a final location is selected in which to site the facility.

Key Decision Factors

    A lot of factors go into a site selection decision. The relative 
importance of various factors will vary with i) the nature of the 
project and ii) the stage of the project. For a broad generalization, 
projects can usually be understood to fall into one of two groups: 
those whose initial and primary drivers are ``people-driven'' (for 
example, R&D facilities) and those whose initial drivers are ``site-
driven'' (for example, large manufacturing facilities). All projects 
will deal with site issues, and all projects will deal with human 
resource issues, but this distinction shows the primary driver and 
influences on various projects.
    Research and development facilities are people-driven. The most 
important factor in locating such facilities is the availability of 
high quality skilled labor. This will include availability of such 
human resources in the community as well as the ability to effectively 
recruit and retain such talent to the new location. And for R&D 
facilities in particular, this recruitment will likely take place on a 
global scale.
    So, detailed criteria evaluations for R&D facilities will focus on 
a wide range of human resource issues. On a broad level such things as 
education attainment statistics, the presence of graduate degreed 
individuals, the presence of other R&D activities, the presence of 
strong colleges and universities, even the community's local education 
system will be assessed. The ability to recruit and retain talent from 
around the world will focus the decision-makers on community 
characteristics, including support for diversity, a wide variety of 
strong cultural and recreational assets (often favoring urban 
amenities), adequate housing at various levels, strong medical 
infrastructure, comfort with the security of the location, and 
excellent transportation and communication infrastructure.
    Final decisions will come from comparing the strongest candidates 
against each other on these factors and the overall cost of the 
project. Costs can vary significantly from one location to the next, 
and these include both up-front investment oriented costs as well as 
on-going operational costs over years. Incentive negotiations are 
typically very important in these final stages of the decision.
    Incentives do influence location decisions. Generally, projects 
drive incentives, not the other way around, and incentive become more 
important as the project proceeds. Incentives cannot make a bad 
location good, but can create or accentuate differences between the 
final candidates. Incentives typically provide a company with i) lower 
costs, and ii) lower risks. Incentives can take the form of grants, 
access to capital, lower cost capital, infrastructure support, 
recruitment, screening and training support, utility cost reductions, 
and a wide variety of tax advantages from exemption to credits to 
abatements.
    While many factors have brought a company to its final decision, 
the final financial comparisons have a major influence on the final 
decision. For R&D facilities, all finalist locations should be ones 
where the ``people'' issues are found to be acceptable, so incentives 
help create distinctions among a set of acceptable alternative 
locations.

Competition for R&D

    The geographic expansion of location decisions to a global 
perspective is well documented. Site searches for all types of 
activities (manufacturing of all types, back office operations, and 
even research and development projects) are now conducted on a global 
basis.
    The countries and regions that understand the R&D location decision 
have positioned themselves to meet the needs and be particularly 
attractive to this business sector. Countries like Singapore and Canada 
have been very aggressive in supporting education, university activity, 
research funding, and research and development rules and regulations, 
all of which attract the attention of R&D location decision-makers. 
Communities such as Singapore and Montreal are very international in 
scope and so represent a strong location for the global recruitment of 
key talent. As the source of supply of Ph.D.s and high quality talent 
grows outside the U.S., the ability to recruit and retain non-native 
talent is critical.

Competition and Incentives

    The U.S. can do a lot to enhance its competitiveness for R&D 
facilities. The U.S. can build on its current success and base of 
existing advanced manufacturing by leveraging a common desire to keep 
R&D and manufacturing in close proximity. There are a number of state 
efforts to establish a strong primary-level research and development 
base through recruitment of key ``stars'' in a particular field and 
building up the R&D and entrepreneurial infrastructure around them; 
federal support could leverage these efforts with great success. 
Related to this are efforts to enhance the entrepreneurial sector 
including licensing policies (especially for joint government-business 
research and development projects) and access to capital at various 
stages of development. The Federal Government could have immediate 
impacts on this factor with enhancements of development activities 
associated with the federal laboratories across the country.
    There is a lot on the books for research and development tax 
credits, but the successful countries are going way beyond that with 
capital-oriented incentives (grants, very large investment tax 
credits).
    The U.S. must find a way to balance enhanced security concerns with 
the need to allow recruitment of talent (and lots of it) from around 
the world.
    A ``Manhattan-Project'' style commitment to key areas of research 
and development (for example energy) could provide an economic stimulus 
that could last for years (if not generations).

                     Biography for Mark M. Sweeney
    Mark Sweeney is a senior principal in McCallum Sweeney Consulting 
(MSC), providing site selection services and economic development 
consulting to companies and organizations worldwide. Recent MSC clients 
include Boeing, Nissan, Dollar General, Michelin, and Trex.
    With more than seventeen years of experience in site selection and 
economic development, Mr. Sweeney assists companies by identifying, 
evaluating, and selecting the optimal location for their capital 
investments. Such projects cover a wide array of related factors, 
including sites, infrastructure, transportation, labor and 
demographics, state and local taxes, utility services, incentives, etc.
    Mr. Sweeney also provides consulting services to leading economic 
development organizations across the United States in such areas as 
strategic planning and organizational design, site certification, 
adaptive reuse, target industry programs, incentive strategies, and 
sustainable development.
    Mr. Sweeney has assisted clients in a wide variety of industries, 
from automotive manufacturing to software development and Internet 
services. Recent clients include Nissan (headquarters; auto assembly; 
engine; warehouse), Michelin (tire and rubber mfg; warehouse), Dollar 
General (distribution); and Trex (composite lumber). Of particular note 
are the Nissan headquarters project (announced their relocation to 
Nashville, TN in November 2006) and the Nissan automotive assembly 
plant (announced for Canton, MS in November 2000). He has conducted 
siting projects in Europe and Asia as well as most regions of the 
United States. Economic development clients include TVA, Duke Power, 
and the States of Oklahoma and Tennessee.
    Mr. Sweeney spent more than five years at the South Carolina 
Department of Commerce, serving as Director of Research and 
Communication. There, he directed departments providing project 
management support, information management (including world's leading 
economic development application of Geographic Information Systems), 
and communications. Mr. Sweeney was also one of the authors of 
Approaching 2000--An Economic Development Vision for South Carolina, a 
state strategic plan for economic development.
    Mr. Sweeney has a Master's in Business Administration from Clemson 
University and a Bachelor of Science from Appalachian State University. 
In addition, Mr. Sweeney was a recipient of a Murphy Fellowship for 
graduate work in economics at Tulane University.
    Mr. Sweeney is married with three children and lives in Greenville, 
SC. He is active in the community and currently serves on the Board of 
Directors for the Carolina Youth Symphony.

    Chairman Wu. Thank you very much, Mr. Sweeney. Dr. Thursby, 
please proceed.

    STATEMENT OF DR. JERRY G. THURSBY, PROFESSOR AND ERNEST 
   SCHELLER, JR. CHAIR OF INNOVATION, ENTREPRENEURSHIP, AND 
       COMMERCIALIZATION, GEORGIA INSTITUTE OF TECHNOLOGY

    Dr. Thursby. Thank you, Mr. Chairman, and thank you, Dr. 
Gingrey. I am going to be high tech today, and so, we are going 
to go to PowerPoint.
    I am going to be talking about results of a survey that 
Marie Thursby and I conducted in 2005. It was of R&D intensive 
firms, about half of them in the U.S. and half of them in 
Western Europe.
    Now, we were asked to talk about recent trends in R&D 
activity, and in our survey, we actually asked that of our 
respondents. We said do you anticipate a substantial change of 
worldwide distribution of R&D employment in the next three 
years. Two hundred and nine respondents answered the question, 
62 percent said no, we are not anticipating a change. Of those 
anticipating a change, we said is it going to be an increase or 
a decrease. Well, you can see up here that the primary 
increases, indeed, are going to be India and China, and there 
is going to be a net decrease in the United States and Western 
Europe. To give a little bit of perspective there, that is 23 
firms in both U.S. and Western Europe who are anticipating a 
decrease in R&D employment in the United States, 15 
anticipating an increase or net change of eight firms, which is 
less than four percent of our sample. But you see a lot is 
going to China and India.
    Now, let me go to the next panel. Well, we asked them if 
they could identify a recently established or planned facility 
outside the home country. If they could, we asked them 
questions about the facility. We asked them, can you think of a 
recently established or planned R&D facility within the home 
country. If you can, we are going to ask you questions about 
that. Two hundred and thirty-five sites were identified. We get 
a slightly different picture here when we look at realizations 
versus their expectations. Realizations here, the bulk of these 
facilities have been in the U.S. and Western Europe.
    Now, 80 percent of these facilities, more than 80 percent, 
were actually established since the year 2000 or were in a 
planning phase at the time that we did it. So, the evidence 
here is mixed. They are saying one thing about anticipation, 
but when you look at the realizations of the recent past, you 
are getting a slightly different picture.
    How about factors, and what drives them to go into these 
particular locations. And notice, we are asking about factors 
involved with specific locations, not what do you think is a 
reason about why you want to go to a location. What really led 
you to that? If you look at facilities in emerging countries, 
and facilities in developed countries, you get a very different 
picture. So the most important factors for going into an 
emerging economy--the most important factor is output markets, 
and we have heard quite a bit of that today. That is growth 
potential of those countries.
    Second most important to these particular firms, for the 
facilities they establish in emerging markets, second most is 
quality of R&D personnel. Tied for third is costs, which were 
equally important university factors; detractors, weak IP 
protection in emerging markets. Now, if you go to developed 
countries, when the sites are actually in developed countries, 
the bulk of these are in the U.S. and Western Europe, the most 
important factor is the quality of people that they can hire, 
and strong IP protection. And those were equally important for 
these firms in establishing these particular facilities.
    Next, access to high quality university faculty and being 
able to collaborate with those universities, then output 
markets. And there were no detractors identified for going into 
developed markets. Notice that cost is not there as a detractor 
for developed market.
    Also, notice what is not up there, and we did ask about, 
one of which is legal requirements to enter markets. They said 
no, that was not influencing decisions. We asked them about tax 
breaks and direct government support as a reason for going to 
those countries. On average, that was not important. For a few 
firms, that was important, but on average, it was not 
important. And we asked them about regulatory restrictions, 
fewer regulatory restrictions, which might attract them to 
particular markets. No, that was not important.
    We also asked them about type of science, a question that 
was proposed to us. What are they doing when they actually go 
there? So we broke science into two categories. One, we called 
familiar science or familiar technology. It is sort of routine 
science, versus new technology, or sort of cutting edge 
science. So we like to think of it as new science versus 
familiar science, and as you see here, the vast majority of the 
effort in emerging economies is in routine science. The new 
stuff, the important stuff, the cutting edge stuff, is all 
taking place in developed economies.
    By the way, the most important factor determining whether 
or not new science versus routine science is taking place, 
universities. Finally, to sort of sum up the major conclusions, 
there is some indication of movement of R&D from developed to 
emerging, but there is some--the recent and strategically 
important facilities are in developed economies. Location 
decisions are complex and vary according to whether the site is 
an emerging economy or developed economy. The most important 
factor for emerging economies, market factors, for developed 
economies, R&D personnel and IP protection. Universities are 
always important.
    Costs are not important in developed economy sites. They 
are tied with universities, of importance in emerging economy 
sites, and the relative importance of factors for new science 
versus familiar science. Universities are very, very important 
in this, and very little new science is being conducted in 
emerging economies.
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Thursby follows:]
                 Prepared Statement of Jerry G. Thursby
                           and Marie Thursby

                 Factors in International Location and

                        Type of Corporate R&D\1\
---------------------------------------------------------------------------

    \1\ This project was conducted with generous support from the Ewing 
Marion Kauffman Foundation, as well as the industry partners of GUIRR, 
the Georgia Institute of Technology, and Emory University. Numerous 
individuals have aided in the design and implementation of this survey, 
but the authors are particularly indebted to Merrilea Mayo of GUIRR, 
Ross Armbrecht, former President of the Industrial Research Institute, 
Andrew Dearing of the European Industrial Research Management 
Association, Harold Schmitz of Mars, Inc., Jean-Lou Chameau of 
California Institute of Technology, Tim Ryan of GFK Custom Research, 
Inc. and Peter Kelly of the American Chemical Society.
---------------------------------------------------------------------------

I. Introduction

    The idea that the United States dominates cutting edge science and 
technology is increasingly challenged as the U.S. share of patents and 
scientific awards declines and the media reports increasing corporate 
reliance on offshore research and development (R&D).\2\ R&D 
globalization is also center stage in policy circles as questions are 
raised as to how the U.S. and Western Europe can provide environments 
conducive to innovation.\3\ Over a concern that policy discussions be 
informed by data, rather than case studies or anecdote, the Government 
University Industry Research Roundtable (GUIRR) of the National 
Academies asked the authors to undertake a study of the factors behind 
R&D site location with particular attention paid to the decision to 
locate in the home country versus other countries.\4\ A survey was 
conducted in the summer and fall of 2005 and results can be found in 
Thursby and Thursby (2006a, 2006b).\5\ The target firms were R&D 
intensive firms and large enough to feasibly have R&D facilities in 
multiple locations. The majority are firms whose home country is either 
the U.S. or a country in Western Europe. For most of what follows we 
aggregate the responses of the U.S. with those from Europe given that 
there are few differences based on the home country of the firm. 
Additional background on the survey is found in the appendices.
---------------------------------------------------------------------------
    \2\ A search of the archives of the Wall Street Journal and the New 
York Times over the period 2002-2005 showed 61 articles focused on the 
offshoring of R&D. Thirty-eight of these articles mentioned costs as a 
factor in offshoring decisions while 29 noted the quality of R&D 
personnel as a factor. Other factors were mentioned as well, though 
none as prominently as costs and quality of R&D personnel. Ten noted 
the role of output markets while four mentioned intellectual property 
regimes and three discussed the role of universities in the process.
    \3\ See, for example, the Council on Competitiveness, 2004, 
Innovate America: Thriving in a World of Challenges and Change, and the 
Committee on Science, Engineering, and Public Policy 2006, Rising Above 
the Gathering Storm: Energizing and Employing American for a Brighter 
Economic Future.
    \4\ Note that this study is a peer reviewed report to the National 
Academies rather than a report by the National Academies.
    \5\ Jerry Thursby & Marie Thursby, ``Here or There? A Survey on the 
Factors in Multinational R&D Location,'' National Academies Press, 
2006a. Jerry Thursby & Marie Thursby, ``Where is the New Science in 
Corporate R&D?,'' Science, Vol. 314, December 2006b.
---------------------------------------------------------------------------
    In this testimony we review and expand upon the findings of the 
earlier studies to address a series of questions posed to us by the 
Subcommittee on Technology and Innovation of the U.S. House of 
Representatives. We were provided with a list of questions. All of the 
questions pertain to the factors that influence R&D location, the types 
of R&D conducted in the U.S. versus lower cost emerging countries, and 
the potential for government policies to attract and retain R&D in the 
U.S. Our survey evidence provides direct evidence on the relative 
importance of various factors, including policies, in both R&D location 
and the types of R&D conducted. Our results point to important 
differences in the factors that influence the decision to conduct R&D 
in developed economies versus emerging economies. Section II identifies 
trends in the distribution of R&D employment worldwide. Section III 
describes the factors considered in the survey and their relative 
importance for companies responding to the survey. Section IV addresses 
the types of R&D conducted in various locations and shows not only that 
there are clear differences in the types of R&D conducted in developed 
and emerging country sites, but the factors that are most important for 
the type of R&D conducted are somewhat different than those that 
influence site selection. The combined evidence is striking. As 
discussed in the conclusions in Section V, while cost is a factor it 
takes a back seat behind market and other input supply factors such as 
quality of personnel. Perhaps the most striking result is the 
importance of expertise in universities and an environment that 
facilitates collaboration with universities in both site location and 
type of R&D.

II. Current and Expected Future Distribution of R&D Employment

    The firms who responded to the survey are generally multinational 
in their R&D efforts. Only about 15 percent of the 248 respondents 
currently have all R&D personnel in the home country whereas about one 
in five have more than half of R&D employees outside the home country.
    While the primary focus of the survey was factors behind the 
respondents' recent R&D location decisions, some questions addressed 
whether the distribution of R&D employment is changing or is expected 
to change. Two hundred and nine respondents answered a question on 
whether they ``anticipate the worldwide distribution of technical staff 
will change substantially'' over the next three years. Thirty-eight 
percent indicated a substantial change was anticipated.
    The firms expecting a change were asked for the region(s) where 
employment was expected to grow and for the region(s) in which it was 
expected to decline. Respondents were given five choices (they could 
choose multiple locations): United States, Western Europe, Former 
Soviet bloc countries, China, India, Other. Results are in Figure 1.




    China and India are the regions where most growth is expected. The 
``other'' category consists largely of targets in Asia. Net decreases 
are expected for the U.S. and Western Europe. For the U.S., 23 
respondents anticipate a decrease while 15 anticipate an increase. 
Fifteen of those anticipating a decrease are U.S. firms and two of the 
13 anticipating an increase are U.S. firms. Thus 11 percent of the 209 
firms expect to decrease employment in the U.S. while 7.2 percent 
expect to increase technical employment in the U.S.; the net change is 
3.8 percent. A larger net change is expected for Western European 
countries. Seven firms (3.3 percent) anticipate an increase in 
technical employment in Western Europe and 35 (16.7 percent) anticipate 
a decrease.

III. Factors in Location Decisions

III.1 New or Planned R&D Sites
    Unlike a number of prior surveys on factors behind R&D site 
locations, this survey did not ask respondents for their general 
perceptions about issues in globalization.\6\ Rather, the survey linked 
factors to specific locations. Respondents were asked whether or not 
their firm had recently established, or was planning to establish, a 
facility outside of the home country. If the answer was ``no'' the 
respondent was not asked further about R&D site locations outside the 
home country. This strategy was used in order to minimize noise in the 
data. Focusing on an actual site decision should, in principle, 
minimize responses driven by what respondents think the factors ought 
to be. In a real sense, the survey solicited responses from those who 
had ``done their homework'' or were ``doing their homework'' about site 
locations outside the home country. The specific survey statement and 
question was:
---------------------------------------------------------------------------
    \6\ See, for example, the Economist Intelligence Unit 2004, 
Scattering the Seeds of Innovation: the Globalization of R&D and the 
Council on Competitiveness 2005, National Innovation Survey.

         Think about some of the more recent R&D facilities established 
        by your firm. This can include facilities you are in the 
        process of building or staffing or which are only in the 
        planning phase. Choose one of these that is OUTSIDE the home 
        country and that is both considered to be central to your 
---------------------------------------------------------------------------
        firm's current R&D strategy and about which you are familiar.

         Does such a facility come to mind?

    If the answer was ``yes'' the respondent was asked a series of 
questions about the identified facility. This exercise was repeated 
substituting ``INSIDE the home country'' for ``OUTSIDE the home 
country.'' Respondents could answer for a) an outside facility, b) an 
inside facility, c) both an inside and an outside facility, or d) they 
would not answer questions about location decisions.
    For identified facilities, respondents were asked for the 
destination country, the year the facility was established (or expected 
to be established) and number (or expected number) of technical 
employees. Ninety-two facilities were identified in the home country 
and 143 outside the home country. Table 1 gives the locations (both 
inside and outside the home country) identified. Facilities are broken 
down by the country location of the facility (the leftmost column) and 
home country of the respondent.
    Given the attention that has been drawn to the establishment of R&D 
facilities in China and India, it is interesting to note that a 
substantial number of respondents were able to identify sites in 
developed economies. There are more sites identified in the U.S. and 
Western Europe (128) than in China and India combined (73). Recall, 
however, that these responses are not for all recent or planned sites. 
Our question was about sites that are both considered central to 
overall R&D strategy and about which the respondent is familiar.




III.2 Size and Age of Selected Sites
    As a measure of the importance of the site, respondents were asked 
both for the number of technical employees employed or expected to be 
employed in the facility and for the number of technical employees 
worldwide. Employment by facility and worldwide employment are highly 
skewed so both the means and medians are reported in Table 2.




    For each R&D site, the survey asked for the year it was established 
or, if it was a planned facility, the length of time before it would be 
operational. More than 80 percent of the facilities were established 
after 2000 or are planned facilities.

III.3 Site Background
    We asked whether a series of statements were or were not correct 
about the site. The statements made were

        1.  This was part of an overall expansion of my firm's R&D 
        effort

        2.  This was an acquisition of an existing R&D site.

        3.  This was to establish or support research relationships 
        with other firms.

        4.  This was to establish or support research relationships 
        with local universities or research institutes.

        5.  This was to support needs of existing production 
        facilities.

        6.  This was a relocation of my firm's R&D effort.

    The Yes/No responses to these statements were aggregated into 
responses for sites in a developed economy versus sites in emerging 
economies (responses for home versus other developed sites are not 
significantly different). The percent who indicated yes to each 
statement is in Figure 2. Developed versus emerging country responses 
are significantly different at a 10 percent level or smaller for all 
cases except supporting production and relocation. The most important 
feature of the sites is the fact that they are generally expansions of 
R&D effort. In contrast sites are less likely to be relocations of 
effort or the product of acquisitions. Emerging economy sites are more 
likely to be for the purpose of supporting university research 
relationships. While perhaps surprising it likely stems from firms 
having already established extensive research networks with 
universities in developed economies, whereas they may only now be in 
the process of establishing these networks in emerging economies.




III.4 Factors in the Selection of R&D Sites
    This Section deals with the factors involved in the decision to 
locate. The approach was as follows. A list of potential factors 
involved in site selection was provided for each site that a respondent 
had identified as a recent or currently planned facility. Respondents 
were first asked whether they agreed or disagreed that the factor was 
correct about the location. They were then asked how important or 
central the factor was in the deliberations on whether to locate in the 
country. For sites outside the home country the statements were:

         We want to know the factors that you considered in locating 
        R&D in this country. First, we will ask if you agree or 
        disagree with a statement about this location as it affects 
        your firm. We use a five point scale where five indicates that 
        you strongly agree and one indicates that you strongly 
        disagree. Three will indicate that you neither agree nor 
        disagree. Second, we will ask how important or central the 
        factor was in deliberations on whether to locate in this 
        country. Use a scale of one to five where five is very 
        important and one is not important at all.

    The following statements about factors were provided (shorthand 
used for each is in parentheses).

         1.  There are highly qualified R&D personnel in this country. 
        (QualR&D)

         2.  There are university faculty with special scientific or 
        engineering expertise in this country. (UnivFac)

         3.  We were offered tax breaks and/or direct government 
        assistance. (TaxBreaks)

         4.  In this country it is easy to negotiate ownership of 
        intellectual property from research relationships. (Ownership)

         5.  Exclusive of tax breaks and direct government assistance, 
        the costs of R&D are low in this country. (Costs)

         6.  The cultural and regulatory environment in this country is 
        conducive to spinning off or spinning in new businesses. (Spin)

         7.  It is easy to collaborate with universities in this 
        country. (CollabUniv)

         8.  There is good protection of intellectual property in this 
        country. (IPProtect)

         9.  There are few regulatory and/or research restrictions in 
        this country. (FewRestrict)

        10.  The R&D facility was established to support sales to 
        foreign customers. (SupSales)

        11.  This country has high growth potential. (Growth)

        12.  The R&D facility was established to support production for 
        export to other countries. (SupExport)

        13.  The establishment of an R&D facility was a regulatory or 
        legal prerequisite for access to the local market. (LegalReq)

    Note that each statement was worded is such a way that agreement 
indicates that, from the standpoint of the firm, the factor is 
favorable for location at that site. If the level of agreement is a 
four or five then the factor is correct about the site and that factor 
is a potential attraction for the site. If a one or two is given then 
the respondent disagrees that the factor is correct and that factor is 
a potential push away from the site. It is then the level of importance 
that indicates whether the factor was actually an attraction or not.
    A similarly worded question was asked about facilities inside the 
home country. Results for sites in the home country are, with few 
exceptions, not significantly different from results for sites in other 
developed countries. For that reason we aggregate home and other 
developed country responses.

III.5 Unimportant Factors
    Five of the 13 factors appear unimportant regardless of site 
location. These five factors have average or mean importance scores of 
less than three (that is, the average of the one to five scale on how 
important or central a factor was in deliberations on the site decision 
was less than three) or only slightly greater than three no matter 
where the site is located. The factors are legal or regulatory 
requirement for market access, tax breaks and/or direct government 
assistance, spinning off or spinning in new businesses, supporting 
production for export to other countries and few research restrictions. 
Results for these factors are in the panels of Figure 3.




    The result on tax breaks and/or other government assistance is 
perhaps surprising given their (apparent) popularity in attracting 
manufacturing. Mean values can mask whether tax breaks and/or direct 
government assistance were offered to some firms (but not others) and 
for those firms TaxBreaks could have been important. For emerging 
economy responses it is the case that only three of 80 respondents (3.8 
percent) both agreed or strongly agreed (i.e., a score of four or five) 
that they had been offered tax breaks and/or direct government 
assistance and had noted the importance of TaxBreaks as either a four 
or five. In developed economies 26 of 140 respondents (18.6 percent) 
either agreed or strongly agreed and also noted that tax breaks were 
important (score of four or five).

III.6 Important Factors: Emerging Economy Sites
    Results for the remaining eight factors for sites in developing or 
emerging economies are in Figure 4; factors are ordered by level of 
importance. Eighty-one percent of these sites are in China or India.




    All factors with the exception of growth are similar in their 
levels of importance. Only the growth potential of the country is 
significantly different from all other factors. The decision to locate 
in an emerging economy is a complex one in which only growth potential 
of the output market stands out as significantly more important than 
all others.
    The results on costs are noteworthy as they conflict with more 
anecdotal reports (see Footnote 2). Respondents agree that costs (net 
of tax breaks and direct government assistance) are low, but they 
attach significantly less importance to them in deliberations on 
selection of sites (one percent level of significance). Costs are lower 
in emerging economies, but they do not stand out as being particularly 
important or central in location decisions as compared to other 
factors. In particular, five factors are higher in importance--and two 
of the five are significantly higher.
    For the two intellectual property factors (ease of ownership of 
intellectual property from research relationships and good protection 
of intellectual property), there is disagreement with the factor 
statements. Nonetheless, both factors were important or central in the 
location deliberations. That is, the IP environment is not good for 
sites in emerging economies, the companies consider this in their 
deliberations, but they nonetheless establish sites there. Clearly, the 
positive factors in these economies outweigh the negative IP factors, 
an issue addressed later in more detail.

III.7 Important Factors: Developed Economics
    Figure 5 gives the results for factors in developed economies; 
factors are ordered by the level of importance. While costs are not 
important, they are included in this Figure for comparison with 
emerging economies.




    The most important factors in the deliberations to place a site in 
a developed economy are intellectual property protection and the 
quality of R&D personnel (which are not significantly different). This 
contrasts sharply with emerging economy sites in which growth potential 
is the most important factor (followed by the quality of R&D 
personnel). The next five factors (``university faculty with special 
expertise'' to ``supporting sales'') are all important with each having 
a mean importance score greater than three, but they are not 
statistically significantly different from each other in importance.

III.8 Summary of the Importance of Factors in Site Selection
    The importance of factors in selecting R&D sites varies according 
to whether the facility is in a developed or in an emerging economy. To 
summarize, we categorize factors by whether they can be viewed as 
attractions to a site or whether they detract from the site. An 
``attractor'' is defined as a factor with a mean agree/disagree score 
greater than three and a mean importance score greater than three. All 
statements about factors are made in such a way that, if true, the 
statement would be positive from the standpoint of the firm. A 
``detractor'' is defined as a factor receiving a mean agree/disagree 
score of less than three and a mean importance score greater than 
three.




    Results on attractors and detractors are in Table 4. The factors 
are presented separately for sites in developed versus emerging 
economies. They are rank ordered by importance; the first factors in a 
list are the most important. An ``equal'' sign signifies no significant 
difference in the factors. For example, the quality of R&D personnel 
and IP protection are equal in importance for locating in a developed 
economy and they are the most important factors in that decision; this 
is followed by university factors, etc.




III.9 U.S. versus Western Europe
    Figure 6 gives the levels of agreement only for those factors where 
there is a significantly different (five percent level) response for 
sites in the U.S. versus Western Europe.\7\ Their level of importance 
is given in Figure 7.
---------------------------------------------------------------------------
    \7\ There are significantly different levels of agreement for 
SupExport but we do not include it in the figure. Western European 
sites are significantly more likely to support exports. However, this 
is almost certainly due to the fact that many European respondents are 
based in small countries that tend to be more exported oriented.




    While the quality of R&D personnel and IP protection are 
significantly higher in the U.S. the differences do not appear to be 
qualitatively large and the importance of the quality of R&D personnel 
is not significantly different. On the other hand, the differences in 
the levels of agreement for growth potential, the ability to spin 
companies in or out, and few restrictions are not only statistically 
significant, but the differences are qualitatively large. Additionally, 
the importance in the location decision of growth potential and few 
---------------------------------------------------------------------------
restrictions are significantly different.

IV. Types of Research Conducted in Developed versus Emerging Countries

    A series of questions were asked regarding the type of research 
conducted at various sites. Rather than use the standard categories of 
development, applied research and basic research, the survey focused on 
whether the purpose of the R&D is to create products and services that 
are new to the firm and whether the R&D involves a novel application of 
science. The following definitions were used:

         A NEW TECHNOLOGY is a novel application of science as an 
        output of the R&D. It may be patentable or not.

         Improving FAMILIAR TECHNOLOGY refers to an application of 
        science currently used by you and/or your competitors.

         R&D for NEW MARKETS is designed to create products or services 
        that are new to your firm.

         R&D for FAMILIAR MARKETS refers to improvement of products or 
        services that you already offer your customers or where you 
        have a good understanding of the end use.

         This gives four possible types of R&D:

                1)  Improving familiar technologies for familiar 
                markets

                2)  Improving familiar technologies for new markets

                3)  Creating new technologies for familiar markets

                4)  Creating new technologies for new markets.

    The survey's use of ``New'' versus ``Familiar'' markets does not 
refer to geographical markets; the question is whether the firm is 
currently selling such a product or service. Respondents were then 
asked for the percent of the technical staff employed in each of the 
above four activities.
    Results do not vary significantly between responses for the home 
country and other developed economies hence the results are aggregated. 
In addition, we have used weighted averages where the weights are the 
number of technical employees at a facility; thus, facilities are 
treated differently according to their size. Results are in Figure 8. 
Results for new science versus familiar science are aggregated in 
Figure 9.




    When comparing types of R&D across sites, work at emerging economy 
sites is always significantly different from effort at other sites.
    It is striking that very little new science is conducted in 
emerging economies. Thus, while companies are conducting R&D in 
economies despite weak IP protection (as shown in Table 4), their 
cutting edge science tends not to be done in those locations.
    In Thursby and Thursby (2006b) we related the responses on 
agreement and importance of the various factors affecting site location 
to the percentage of effort devoted to new science in the sites. The 
primary results are given In Table 5. The first column lists each 
factor considered important in site selection and the second column 
gives the importance rank attached to the amount of new science 
conducted. Note that the importance of factors for the type of science 
conducted is different from the importance of factors in site 
selection. Of particular note is the fact that university 
characteristics are the most important factors in determining where new 
or cutting edge science is conducted.




V. Conclusion

    Our survey evidence directly addresses several of the Subcommittee 
questions. First, we explored the role of a variety of factors in R&D 
site location. We included thirteen factors, including demand factors 
such as market growth potential, resource supply factors such as cost 
or quality of technical personnel, as well as a number of policies such 
as taxes, IP protection, and regulatory environments.
    Several results are striking. First, as shown in Table 4, the 
relative importance of factors for sites located in emerging economies 
is quite different than those in developed economies. Quality of R&D 
personnel and IP protection are the most important attractions for 
companies locating in developed countries, while output market 
potential is the most important attraction of emerging economies. 
Second, university expertise and the ease of collaborating with 
universities is the third most important factor in developed countries 
and they are tied with cost as the third most important factor in 
emerging countries. Third, as shown in Figures 5 and 6, when sites in 
the United States and Western Europe are compared, the United States 
appears to be more conducive to location when the growth potential of 
the market is considered important.
    We also explored the type of R&D conducted in different locations 
and in our Science publication. An important result from our combined 
studies is that the factors that are the most important in determining 
location are somewhat different that those that determine the type of 
R&D conducted. While universities, and an environment conducive to 
collaboration, are among the top three factors in attracting a 
facility, they are the most important factors in determining where the 
cutting edge science is conducted. IP protection is a significant 
detractor to locating in emerging economies (see Table 4), but notice 
in Table 5 that IP protection does not determine the type of science. 
Our interpretation, explored more fully in Thursby and Thursby (2006b) 
is that IP protection is important for conducting both cutting edge and 
routine R&D.
    From a policy perspective, then, these results emphasize the 
importance of policies that support the conduct of R&D. These include 
policies to support the training of a highly qualified technical 
workforce as well as good IP protection which provides incentives not 
only to conduct R&D but facilitates the exchange of ideas emerging from 
research. According to the firms in our sample, both the quality of R&D 
personnel and IP protection are highest in the United States. The 
results on ease of university collaboration further emphasize the need 
for policies that facilitate the exchange of ideas. Finally, it should 
be noted that while on average tax breaks were not important, for 
companies locating in developed countries almost 19 percent said they 
were important.

Appendix A:

              Survey Design and Respondent Characteristics

    The survey has benefited not only from the input of GUIRR but also 
from the input of the Industrial Research Institute, the European 
Industrial Research Management Association and the American Chemical 
Society's Committee on Corporate Associates. R&D managers from ten 
firms were interviewed about R&D site locations and the design of the 
survey. Based on those discussions the most relevant issues on R&D 
location strategies and factors in the location decision were 
identified. Discussions also covered mechanisms for capitalizing and 
protecting intellectual property. Survey responses were obtained over 
the period May 2005 to February 2006.
    The industry of the respondent is given in Figure A1. Note that 
respondents were permitted to specify more than one industry. Two 
hundred and eighty industrial selections were made.




Appendix B: Definitions

    R&D effort can be defined in a variety of ways. Here effort is 
defined in terms of employment. Questions regarding expenditures are 
subject to greater potential measurement error than are questions 
regarding employment. First, there are the usual problems with exchange 
rate conversions and issues of purchasing power across economies (e.g., 
is $1mil spent on R&D in the U.S. comparable to the same amount spent 
in, say, China). Second, it is clear from interviews with R&D managers 
that they were more likely to have a clear notion of employment in 
various locations than they would expenditures. It is also noted that 
employment effects generally translate directly into policy issues of 
interest.
    The survey began with a set of definitions:

         For the purpose of this survey, we consider research and 
        development, that is, R&D, to encompass the following: 1) R&D 
        that entails new applications of science to develop new 
        technologies, 2) R&D to improve technologies currently used by 
        you, 3) R&D to create new products or services, and 4) R&D to 
        improve existing products or services sold or licensed by you.

         Whenever we use the phrase ``technical staff'' we mean 
        employees who conduct or support R&D. These include 
        researchers, research assistants, lab technicians and engineers 
        involved in any of these types of R&D.

         Whenever we use the word production we mean either 
        manufacturing of a good or provision of a service.

         Product means either a good or provision of a service.

           Biographies for Jerry G. Thursby and Marie Thursby
                             JERRY THURSBY
    Dr. Jerry G. Thursby is a member of the strategic management 
faculty of Georgia Institute of Technology and holds the Ernest 
Scheller, Jr. Chair in Innovation, Entrepreneurship, and 
Commercialization. Prior to joining the College of Management in 2007 
Professor Thursby was Goodrich C. White Professor of Economics and 
Chair, Department of Economics, at Emory University.
    Professor Thursby has received several teaching awards and has 
published extensively in the areas of econometrics, international 
trade, and the commercialization of early stage technologies with a 
particular interest in the role of university science in national 
innovation systems. His work has appeared in such prestigious outlets 
as American Economic Review, Journal of the American Statistical 
Association, Management Science and Science. He has received research 
funding from the Alan and Mildred Peterson Foundation, the National 
Science Foundation, the Sloan Foundation, National Bureau of Economic 
Research through the NBER Project on Industrial Technology and 
Productivity, the Ewing Marion Kauffman Foundation, the National 
Institutes of Health, the Georgia Research Alliance, and the U.S. 
Department of Agriculture. He currently serves on the editorial board 
of the Journal of Technology Transfer and is an associate editor of the 
Journal of Productivity Analysis.
    Professor Thursby has held faculty appointments with Emory 
University, The Ohio State University, Purdue University and Syracuse 
University.

                             MARIE THURSBY
    Dr. Marie Thursby is currently a Professor of Strategic Management 
and holds the Hal and John Smith Chair in Entrepreneurship at the 
College of Management, Georgia Institute of Technology, as well as an 
adjunct professorship in Economics at Emory University. She has been a 
research associate of the National Bureau of Economic Research for 
twenty years and serves on several major journal editorial boards, 
including Management Science and the Journal of Technology Transfer.
    Thursby has published extensively on the economics of innovation, 
with particular emphasis on role of universities in innovation systems, 
multinational R&D decisions, and the role of contracts in effective 
technology transfer. Other research interests include international 
economics and industrial organization, with a focus on how government 
policies and industry interact to determine competitiveness. Her work 
has been published in top-ranked peer-review journals such as Science, 
Management Science, the American Economic Review, and her most recent 
research on multinational R&D has been published by the National 
Academies Press. She has received research funding from the Alan and 
Mildred Peterson Foundation, the Alfred P. Sloan Foundation, the Ewing 
Marion Kauffman Foundation, the Ford Foundation, General Motors 
Corporation, the National Institutes of Health, the National Science 
Foundation, and the U.S. Department of Agriculture.
    Prior to joining Georgia Tech in 2002, Professor Thursby held the 
Burton D. Morgan Chair of International Policy and Management at Purdue 
University, with prior faculty appointments at the University of 
Michigan, Ohio State University, Syracuse University, and North 
Carolina State University. She received her A.B., cum laude, in 
Economics from Mount Holyoke College and her Ph.D. from the University 
of North Carolina at Chapel Hill.

                               Discussion

    Chairman Wu. Thank you, Dr. Thursby.
    Now, we move to the question phase of our proceedings, and 
the Chair recognizes himself for five minutes. These five 
minute periods, as you all have already experienced, go very, 
very quickly. I would like to get in at least two questions, 
the first one narrowly cast, and then the second one a broader 
question to the entire panel.
    Dr. Atkinson, you referred to some incentives or some 
inducements to locate R&D facilities as close to, if not unfair 
trade practices. Can you elucidate what some of those practices 
might be that border or cross the line as unfair trade 
practices?
    Dr. Atkinson. Clearly, one is tying market access to 
putting a facility in the country. I am aware of a major U.S. 
firm that was told if it wanted to access the Chinese market, 
it had to establish an R&D facility in Beijing, which it did, 
and it put 500 researchers there.
    It was not planning to do that. It wanted to do the R&D 
domestically here in the U.S. Now, you can argue, well, some of 
the surveys don't quite pick that up. Actually, some of the 
surveys that I have seen actually do pick that up, particularly 
in the IRI survey. And anecdotally, you hear it a lot.
    One of the reasons surveys may not pick that up as much is 
companies are in a bind. They have no market, they have no 
bargaining power, really, you know. The only bargaining power 
will be, again, the U.S. Government versus foreign governments 
on this, because companies are not going to say, we are going 
to blow the whistle on this, because then they don't get market 
access. So some other company will get that market access.
    That is the principal, that is, I think, one of the 
principal things. You can make an argument that, at least under 
some of the EU rules, for example, that some of these very, 
very large subsidies are a violation of the WTO. And we just 
issued a report called The Rise of the New Mercantilist Unfair 
Trade Practices in the Innovation Economy, which I would be 
happy to submit, but it listed a wide array of these practices: 
standards manipulation, intellectual property theft. Another 
problem is that companies will move facilities there, and then 
the IP will be stolen, frankly, and the government will do 
almost nothing. In fact, sometimes turning a blind eye to it, 
and then that IP goes to U.S. competitors, who then produce 
product as well, so----
    Chairman Wu. If you could submit that to the Committee, I 
would deeply appreciate it. And now, more broadly, to the 
panel. In my personal experience in Oregon, we began by 
attracting manufacturing facilities for the semiconductor 
industry, and then, a lot of R&D facilities followed. And 
sometimes, R&D facilities follow manufacturing, sometimes 
manufacturing follows R&D.
    Could you all address for me, please, the factors that you 
see that drive either one, and particularly, how manufacturing 
might follow R&D overseas, and R&D might follow manufacturing 
overseas?
    Dr. Thursby. Well, I think probably it depends on the 
country. At this point, and I will speak about India and China, 
and I won't speak about any other countries.
    At this point, I think you are getting R&D following 
manufacturing to China, but that is also mixed, of course, with 
this exploding Chinese market that you want to access. So, in 
that particular case, R&D is following manufacturing, though 
there is other R&D in China that is very high end R&D. I have 
to caveat, or disagree a little bit with the previous 
presentation. You have extremely high end R&D in China, in the 
Microsoft Research Lab in Beijing. Also in the Google lab in 
Bangalore. I have been there. These are Ph.D.s from only the 
Stanfords, Berkeleys, and MITs, not from second tier 
institutions. This is absolute cutting edge research, at the 
finest level in the world.
    In the case of India, where R&D and services are what the 
Indians are doing, there hasn't thus far been that much 
movement of manufacturing following R&D, and, I think, if it 
does move to India, it will probably be for the domestic 
market, like the new Nokia operation there. So in certain cases 
there is a linkage. In many others, I would say we don't see 
that linkage.
    Dr. Atkinson. Historically, in the regional science 
literature, what has been the predominant view is that you have 
this product cycle, and you start off with innovation and 
creation of new product through the R&D process, and then, the 
sort of first stage production usually is proximate to that, 
because you are working out the bugs and all that, and then, 
eventually, as production matures, it becomes more 
commoditized, it becomes locationally free, and goes to 
offshore.
    I think one of the dangerous views, though, I think, that 
is emerging out in the U.S., is that that model no longer holds 
and that we don't really need to worry about R&D. It is 
manufacturing that is important, and R&D no longer is tied to 
manufacturing. And, I think, I would agree with Dr. Kenney. I 
think there are occasions where that is true, where R&D follows 
manufacturing, and there are also just as many, if not more 
cases, where R&D leads to manufacturing. We have seen that in 
Israel, for example, which by the way, has of all the countries 
in the world, has the biggest R&D and GDP ratio increase. I 
mean, they have just gone gangbusters, and they have been able 
to, out of that R&D, create production that still stays in 
Israel.
    So I do think that it is a complex issue. I don't think it 
is one where we can just say R&D doesn't lead to manufacturing. 
I think it does in many cases.
    Dr. Thursby. I think the reason why we found so much 
familiar science in emerging markets is because that science is 
actually following sales in those markets. It is following 
manufacturing. A lot of that is product localization. Yes, 
there is some cutting edge science being done in China, but it 
is not a lot of it. In fact, where you really find it is in 
things like Microsoft, or a permutation, apparently the Chinese 
are excellent in.
    So I think that panel shows that what is going there is, by 
and large, supporting sales, which in the earlier panel, I 
showed that was the most important reason for going into, 
setting up R&D in emerging markets, which because of the growth 
potential in those markets, and because they want to support 
the sales, support sales in those markets. When you talk to 
business executives who have set up R&D labs, what you 
continually hear is that our company is afraid not to be in 
China and India, because that is a huge growth market. If we 
are not there now, we are sort of behind the eight ball 
ultimately. And one way they enter those markets is R&D. And I 
think it is probably true some of the R&D may precede 
manufacturing, but I think a lot of it is following. So, we are 
just going to put manufacturing into China, we are going to put 
manufacturing into India, and it is natural to have R&D follow 
that manufacturing.
    Thank you.
    Chairman Wu. Thank you. Any other member of the panel?
    Dr. Kenney. I would just like to interject something. China 
is manufacturing. The R&D in India has not followed 
manufacturing. That is just a fact. I just want to be very 
clear that those two countries are very different countries, 
and the way they are being inserted into the global economic 
system is quite different.
    So, when you talk about R&D following manufacturing, I 
think in the case of China, that is quite correct. In the case 
of India, there just isn't that much multinational 
manufacturing there. It is now starting to come in. So, I think 
we need to be very careful that we look at different countries.
    Dr. Atkinson referred to Israel, again, a very different 
insertion into the global economy. Very much at the very 
highest end of global research. I mean, what is going on in 
Israel is, for all intents and purposes, equivalent to Silicon 
Valley, and you can see it. I do a lot of work on the 
globalization of the venture capital industry. You can see it 
in the investments that are made in each of those geographies 
by the VCs, and I'm talking about Sequoia, I mean the elite 
U.S. VCs, and of course, the domestic VCs.
    You have to be very careful. They look at the world, as all 
firms do, and think about what are the assets there and what 
will be the assets there. And I think that is a better way to 
look at it, if you want to be very granular. At the more 
general scale, then, one can have different kinds of answers, 
but I am pretty granular on this.
    Chairman Wu. If I may, just take advantage of my position 
as Chair here to drill down one further step. In looking at 
this difference between India, China, and Israel, are those 
market forces driving this, human talent forces driving this, 
or government policy forces driving this? What is the 
combination of things that are driving these differences 
between those three different developmental patterns?
    Mr. Sweeney.
    Mr. Sweeney. And I think it might have been brought up 
earlier, the first and foremost factor is going to be the 
availability of talent, so all the other factors won't matter 
too much, if these locations didn't have the presence of the 
type of talent that is needed. Now, once that talent is 
established, then the other factors can make a difference, and 
I think cost, for some types of activities, is going to be very 
important, particularly if the cost differences for accessing 
that talent are dramatic.
    So I think it is a combination of market forces forcing 
companies to look where they can do this best, finding where 
the talent is, and then finding among that smaller set of 
locations the location that presents the best cost and benefit 
profile within that picture.
    Chairman Wu. Perhaps we could return to this in a moment. 
Let me recognize the Ranking Member of the Subcommittee, Dr. 
Gingrey.
    Mr. Gingrey. Mr. Chairman, thank you.
    And Mr. Sweeney's comments about talent, I think, are very 
appropriate, and of course, as all of you know, this committee, 
the Science and Technology Committee, and particularly, the 
Subcommittee on Technology and Innovation, we have really done 
a lot of work in the America COMPETES Act in regard to trying 
to solve that talent problem. And I think 10,000 Minds, or 
whatever the title was, it is important work and we have done a 
good job on that, and I think we are addressing this disparity 
and will continue to do that. Obviously, more needs to be done.
    But as Mr. Sweeney just said, if talent is not here, and 
the talent is there, whether you are talking about China or 
India or Israel or wherever, that is first and foremost. And if 
the talent is here, in equal quantity and quality, then I think 
the cost factor really raises its ugly head if I can say ugly, 
not being too pejorative about cost, because I think it is 
important. My question then is, we will continue to work on 
this, on the talent factor, and indeed, maybe even the cost 
factor.
    But Dr. Atkinson, in your testimony, you talked a little 
bit about this, the National Innovation Foundation. And I would 
particularly like to pursue that question with you and the 
other witnesses, in regard to that, if this is the direction 
that you and maybe the other witnesses think we need to go in, 
or is there some difference of opinion about that?
    Dr. Atkinson. Well, thank you.
    As I said, this is a new report that we will be issuing 
jointly with the Brookings Institution, I believe in early 
2008. And one of the spurs of looking at this issue was initial 
research that we had done that showed that many, many countries 
now, particularly in the last decade, have established 
analogues to their science agencies, and have also established 
these innovation or technology agencies. So, for example, the 
UK just established theirs earlier this year. Korea just 
established theirs in 2002. Finland has a premier entity called 
Tekes, which, I am not advocating we would fund it at this 
level, but if they were funding it at the level of per capita, 
if we funded it at that level, we would be investing $33 
billion a year. I mean, that is the level of commitment that 
they have made to this.
    What I would envision this doing is certainly not 
industrial policies, certainly not picking winners and losers, 
but really doing two main kinds of things. One is--there is a 
program that you may be aware of called MARCO, the 
Microelectronics Advanced Research Corporation, which is a 
DARPA-funded initiative with the semiconductor industry, and it 
funds, I think, I don't remember the number, six or seven focus 
centers at universities around the country.
    And what they have done is, the semiconductor industry 
realized they can't invest in R&D that is six to ten years out. 
It is just too risky for them in this global, competitive 
market. So by partnering with DARPA and industry money and 
putting together a roadmap of where they see these real, 
technical, and scientific challenges, they then have worked 
with universities to do that. I think that is a very, very good 
model, and I think I would see this National Innovation 
Foundation as supporting more of that.
    The second key issue, and we alluded to it a little bit, is 
the states are a very important player here. I ran a State 
Economic Development for the Governor of Rhode Island, and one 
of the things that states do is they invest in a lot of the 
kinds of things that it is really inappropriate for the Federal 
Government to do, or the Federal Government is too large, it is 
too distant, but the states, Oregon being a good example, they 
have a nanotechnology initiative, a biotech initiative, but the 
states underinvest in those, because--and I worked for a 
Governor. I understand that you have got a term, and those 
benefits oftentimes accrue after your term of office is over, 
or they may spill over to the next state.
    So I think a federal/state partnership to help states do 
this kind of technology-led economic development, do more of 
it, would be an important role.
    Thank you.
    Mr. Gingrey. Any others want to comment on that as well? We 
have a little more time. Dr. Kenney.
    Dr. Kenney. I think that there--each of this nations you 
mention, Israel, China, and India, have different strategies. 
India's is basically tax rebates for call centers, R&D, 
whatever you would like, very straightforward, sort of, almost 
a vanilla envelope type of benefits. China, of course, has R&D, 
subsidizes R&D, or gives tax benefits, for both domestic and 
multinational firms. I think the real, and of course, some 
property, real estate, that is often not the national 
government, but the various provincial, Shanghai, Beijing, give 
real estate rebates. And the other thing that Dr. Atkinson said 
is, there is pressure. Most of it, you are not actually going 
to be able to see. It is informal pressure from bureaucrats, 
saying you know, hey, you have got a nice market here. We would 
love to see an R&D facility, not a mandated, you must have an 
R&D facility. So it is going to be very hard to pick, and it is 
subtle pressure. So I think that is pretty clear.
    Israel is very interesting. Israel invested in R&D, first 
of all, attracted American manufacturing and R&D facilities, 
Motorola, Intel, a number, this was back in the '80s, then 
developed a very sophisticated subsidy program for its venture 
capital industry. And it is sort of a case study of brilliance 
and good management, and I think we could learn something from 
how Israel organized the attraction of R&D, the movement 
upstream of the marketplace, but you have to understand that is 
both a small country, and a country that makes investments in 
R&D and educating its workforce on a probably unparalleled 
scale, except, perhaps, Northern Europe.
    So I think there is a lot to learn from the way the 
Israelis built an entrepreneurial economy, built their venture 
capital industry. And I think Steve Morris is absolutely right. 
The United States is going to compete through entrepreneurship 
in the future, and we have to continue to figure out ways to 
incentivize venture capital, to incentivize entrepreneurship. 
We need to look at the university technology licensing offices, 
as to whether they are transferring the technology out there 
quickly or they are becoming bureaucratic fetters to the 
transfer of technology.
    And I don't think we have really looked at that very 
seriously in our research. So that is one area that I would 
really put my finger on, and say we might continue to think 
about that.
    Mr. Gingrey. Mr. Chairman, I see that my time has expired. 
In the second round, I would like, maybe, for Dr. Thursby to 
address that point that Dr. Kenney just made at the end.
    Thank you.
    Chairman Wu. Thank you very much, Dr. Gingrey. And now, the 
gentlelady from California, Ms. Richardson.
    Ms. Richardson. Yes. Thank you, Mr. Chairman. First of all, 
I would like to acknowledge our Ranking Republican Member, Dr. 
Gingrey. I am happy to hear you say--Dr. Gingrey, I am happy to 
hear you say that you are willing to look at the cost. That is 
very encouraging to me.
    Mr. Gingrey. Absolutely.
    Ms. Richardson. So the fact that I think we all realize we 
need to be competitive, but at some point, we realize there is 
going to have to be a cost associated to it.
    Mr. Gingrey. Absolutely.
    Ms. Richardson. And your leadership--of being willing to 
get that, and say yeah, that is something we might need to look 
at, I think, is very encouraging, so I wanted to compliment you 
before you make your mad dash.
    The second thing, going specifically into the questions 
that I had, Dr. Kenney, and I think Dr. Gingrey was going down 
that pathway. Can you elaborate specifically on how university 
technology licensing rules affect our competitiveness? Can you 
give us more specifics?
    Dr. Kenney. I think Bob Litan from the Kauffman Foundation 
has recently put out a report on the role of university 
licensing offices in frustrating the technology. Most of what I 
know is anecdotal from my university and others, about how 
difficult it is to work through a university bureaucracy that 
doesn't know the technology often as well as the inventor 
herself or himself. And therefore, actually becomes an 
unknowledgeable intermediary between either the venture 
capitalist, if we are talking about a spinout sort of 
situation, for those of us in California, is quite important, 
or the large firm. And this, particularly the IT firms, have 
been very upset about how the tech licensing offices are 
controlling IT technology. And Intel and IBM, I know, have 
actually started a consortium to create a set of new rules for 
tech transfer from IT and CS departments.
    So, it also probably depends on the particular technology, 
as I outlined in my statement, the particular industrial 
linkages. Is it an entrepreneurial situation, versus a 
licensing to a large firm? I think it is across that spectrum 
of industries and departments. There hasn't been that much 
research that has looked at that.
    Most of the research that is being done right now on tech 
transfer comes out of the AUTM data, the Association for 
University Technology Managers Database. That database is 
actually, and I have done some research looking at all 
entrepreneurial firm coming out of universities like UC-Davis, 
Wisconsin, Illinois, and that is just a subset of all of the 
technology that comes out. So, AUTM itself, the research, has 
not looked at the full spectrum of firms that are coming out. 
So, I would say that right now, we don't have the research to 
really know this. So, I have mostly anecdotes that I hear from 
people around the country, scientists who are trying to move 
tech out and are having difficulties with their tech licensing 
office.
    Ms. Richardson. As you find specific information, if you 
could supply it to this committee, that would be helpful. My 
second question, more to Mr. Sweeney, but I think it applies to 
most of those on the panel. Could you provide this committee 
specific examples of China, India, and Israel, of policies that 
they implemented? We talked about them fairly broadly. I mean, 
you alluded to Israel, you know, we said well, China does this, 
India does that, but nothing specific.
    And I think really, hopefully, the power of this committee 
is that, at some point, we could bring forward some legislative 
proposals that might mirror and help us to be more competitive. 
So, if we could get some specific language of what some of 
these countries have done, that would, I think, enable us to 
better consider economically if it is something that we can do 
as well.
    Mr. Sweeney. Yes, I would be glad to address that.
    I will defer the India/China/Israel comments to my 
colleagues here, and I do want to remind everybody that it is 
not just those three countries for which we compete with R&D. 
The developed countries are more than just the U.S. I am 
assuming that is not a fire alarm. Is that correct?
    Just on this continent, Canada has an aggressive federal 
tax credit for R&D throughout the country that is complemented 
by provincial policies, and that varies from province to 
province. Some provinces are very aggressive. Part of the value 
of those tax credits, for one of our clients in particular, is 
that they were refundable credits. So, you get a credit for the 
amount of capital that you invest in research and development. 
If you do not have a tax liability early on, and typically, you 
don't, to capture that credit, it will be refunded as cash, so 
it is a very capital favorable type of credit that has an 
immediate high impact on the location decision, because it 
addresses an upfront cost.
    Away from specific company policies, like tax credits and 
grants, Canada also has invested in research institutes. The 
oil sands area of Northwest Canada is one of the biggest 
booming areas in the world right now with activity. Most of 
that started with government funded research, with hundreds of 
researchers in government research labs developing the ability 
to economically extract energy from the oil sands and shales of 
Northern Canada.
    So, it is a combination of spending money on research 
institutes at a government level, or a public/private 
partnership level, as well as tax credits, and other types of 
benefits to influence specific companies.
    Those types of things have worked very, very well for 
Canada. They are working, starting to work well even in Europe. 
Overall, that chart may show Western Europe having a declining 
amount of R&D, but the EU has focused on that as something they 
need to address, and even a country like France, that has now 
largely dramatically increased their tax credits for R&D.
    There are very specific tax credits and expenditure 
programs out there.
    Ms. Richardson. Okay.
    Chairman Wu. Thank you, Mr. Sweeney. And I thank the 
gentlelady. We have just gotten notice of six votes upcoming on 
the floor, and if it is acceptable to the members of the panel, 
what I would like to do is to try to get through one round of 
questions for everyone, and perhaps a followup for Dr. Gingrey 
for Dr. Thursby.
    And if the gentlelady would yield, I would like to proceed 
with the gentleman from Utah, Mr. Matheson.
    Ms. Richardson. I am sorry, Chairman. I would like to 
clarify that I made a specific request. Could each of you who 
have information about specific policies, because it did make 
up a majority of the conversation that we had today, that you 
could supply us with those specifics of those various policies, 
whether it is companies or countries, so we could have some 
specific things to review. Okay. Thank you.
    Chairman Wu. That request will be made, and I am sure the 
witnesses will be happy to supply that in writing.
    Mr. Matheson.
    Mr. Matheson. Well, thank you, Mr. Chairman. I will just 
ask one question at this point.
    An issue that has gotten a lot of discussion in the 
political dialogue of our country recently, in general, has 
been our country's immigration policy. But it seems to me one 
aspect of immigration policy that has not received much 
attention is the impact of our current immigration policy, with 
respect to highly skilled workers in this country. And I think 
that this discussion today about how this country positions 
itself, in terms of being competitive in the R&D world, it is 
relevant to at least ask the Committee about their opinions 
about how our current immigration policy is affecting both our 
academic centers in this country, and also, the private sector, 
in attracting bright people that can encourage development of 
solid R&D within our country? And I would just throw that 
question out to the panel.
    Dr. Atkinson. I would like to take the first comment on 
that, if I may. As we have said, I think, pretty consistently 
here, the ability to attract talent is the primary driver in 
the initial stages of location decisions for R&D. When you look 
for attracting talent, you want to see if the talent is where 
you are looking, but in addition, you want to be able to 
recruit and retain that talent to the community that you are 
considering.
    That gets into a lot of quality of life issues, but even 
before that, because the production of this talent is no longer 
the dominant domain of the U.S., in terms of producing Ph.D.s, 
R&D firms recognize that their recruitment is going to be on a 
global basis. So, their question is, how effectively can I 
recruit globally the talent that I need to staff and develop my 
facility?
    The U.S. is no longer the primary source of internally 
grown talent, and is no longer the easiest location in which to 
recruit that talent. Somehow, the U.S. policy has to balance 
the security concerns with the need to recognize that the 
talent that this country needs to succeed is available 
throughout the world. Other communities and countries, 
Singapore and Montreal are both very, very effective at not 
only growing the talent, but especially, in recruiting globally 
the talent that they need, and both of them have become very 
strong R&D centers.
    Mr. Sweeney. I don't think anybody on this panel would 
disagree that it is very, very important to have high quality 
people coming into the U.S., but I want to go a step beyond 
that, and I think there is a looming problem with keeping them 
in the United States. It is because the opportunities for them 
back in their home country is much, much greater. I give that, 
this is anecdotal evidence, incidentally, which I typically 
don't like. I would rather be systematic, but I know of one 
professor at Georgia Tech had been there for 23 years. He was 
Indian, and he returned home, because he had, now, better 
opportunities in India than he would have had 23 years ago.
    Another firm in our survey established a facility in China, 
simply because they had Chinese scientists who they valued 
greatly, who wanted to go home to China. So, the only way the 
firm was going to keep them was to put a facility in China, and 
put that fellow in charge of that.
    So I think the issue is a little broader than just bringing 
them in. It is keeping them here once they get here, because it 
is becoming very--they can maintain the same lifestyle now, in 
many areas of China and India, that they could maintain in the 
U.S. and they could be home.
    Mr. Matheson. I yield back, Mr. Chairman.
    Chairman Wu. Thank you very much. And Mr. Mitchell? No 
questions, then. Dr. Gingrey, you had a followup question.
    Mr. Gingrey. Mr. Chairman, yes, and if Dr. Thursby will 
follow up to the question that maybe Dr. Kenney asked 
rhetorically in regard to the universities and licensing and 
transferring technology.
    Dr. Thursby. I need that on, don't I? What I would really 
like to talk about here is the importance of federal funding 
for R&D facilities. We have pulled out health care from other 
industries, and of course, federal funding of health care has 
been pretty dramatic in the last 20 years, and if you look at 
where the target for R&D in health care happens to be, it is 
the U.S.
    Now, there are a number of reasons for this, but I think 
the primary reason that the U.S. is a target is because for so 
many years, there has been substantial funding in health care, 
which has created a base of high quality people that these 
firms can hire, as well as labs within universities, where 
knowledge can spill over into these firms.
    And that was simply all I wanted to add to that.
    Chairman Wu. Thank you very much, and I want to thank the 
entire panel. And before we bring the hearing to a close, I 
want to thank all of you and all the participants.
    The record will remain open for additional statements from 
Members, and for answers to follow-up questions, and I will 
have at least several written questions that I did not get an 
opportunity to ask from the dais today.
    The witnesses are excused, and the hearing is now 
adjourned. Thank you all very, very much.
    [Whereupon, at 11:22 a.m., the Subcommittee was adjourned.]




























THE GLOBALIZATION OF R&D AND INNOVATION, PART IV: IMPLICATIONS FOR THE 
                   SCIENCE AND ENGINEERING WORKFORCE

                              ----------                              


                       TUESDAY, NOVEMBER 6, 2007

                  House of Representatives,
         Subcommittee on Technology and Innovation,
                       Committee on Science and Technology,
                                                    Washington, DC.

    The Subcommittee met, pursuant to call, at 2:30 p.m., in 
Room 2318 of the Rayburn House Office Building, Hon. David Wu 
[Chairman of the Subcommittee] presiding.



                            hearing charter

               SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION

                  COMMITTEE ON SCIENCE AND TECHNOLOGY

                     U.S. HOUSE OF REPRESENTATIVES

                      The Globalization of R&D and

                          Innovation, Part IV:

                      Implications for the Science

                       and Engineering Workforce

                       tuesday, november 6, 2007
                          2:30 p.m.-4:30 p.m.
                   2318 rayburn house office building

1. Purpose

    On Tuesday, November 6, 2007, the Committee on Science and 
Technology's Subcommittee on Technology & Innovation will hold a 
hearing to consider the implications of the globalization of research & 
development (R&D) and innovation for the American science, technology, 
engineering and mathematics (STEM) workforce. This hearing--the fourth 
in a series of hearings examining the impact of globalization on 
innovation--will explore the impact of high-technology offshoring on 
American STEM workers and students. Witnesses will discuss the new 
opportunities and challenges for workers created by globalization, 
including how globalization is reshaping the demand for STEM workers 
and skills. The witnesses will also address how offshoring is affecting 
the STEM workforce pipeline and how incumbent workers are responding to 
globalization.

2. Witnesses

Dr. Michael S. Teitelbaum is Vice President of the Alfred P. Sloan 
Foundation. He is a demographer who has studied the supply and demand 
science and engineering labor market.

Dr. Harold Salzman is Senior Research Associate at the Urban Institute. 
He is a sociologist who has a recent study on the STEM workforce 
pipeline and offshoring.\1\
---------------------------------------------------------------------------
    \1\ Into the Eye of the Storm: Assessing the Evidence on Science 
and Engineering Education, Quality, and Workforce Demand. Available at 
http://www.urban.org/UploadedPDF/
411562_Salzman_Science.pdf

Dr. Charles McMillion is President and Chief Economist of MBG 
Information Services. He is an expert in evaluating economic trade 
---------------------------------------------------------------------------
data, particularly trade in advanced technology with China.

Mr. Paul J. Kostek is Vice President for Career Activities of the 
Institute for Electrical and Electronics Engineers-USA. IEEE-USA is the 
largest professional engineering society in America. The Career 
Activities Committee focuses on promoting the career-related policy 
interests of electrical, electronics and computer engineers and related 
information technology professionals, with a special focus on U.S. 
members.

Mr. Henry Becker is President of Qimonda North America, a supplier of 
memory products with facilities and offices in North America, Europe, 
and Asia.

3. Brief Overview

          Most analysts believe that globalization will not 
        affect the aggregate number of jobs in the U.S. However, they 
        believe it will change the mix of occupations. Certain 
        occupations will experience net losses while others will 
        increase, and the skills demanded will shift.

          Some analysts estimate that between 30 and 40 percent 
        of all U.S. jobs will be vulnerable to offshoring. This 
        vulnerability reflects the fact that a large share of 
        previously non-tradable jobs has become tradable, putting 
        downward pressures on wages for U.S. workers in those 
        occupations.

          High-wage jobs requiring advanced STEM education and 
        skills are also offshorable, and some analysts estimate they 
        are among the most vulnerable to offshoring with computer 
        programming topping the list of all occupations. According to a 
        study conducted by Alan Blinder, director of Princeton 
        University's Center for Economic Policy Studies, 35 of 39 STEM 
        occupations are offshorable, including 10 of 12 engineering 
        disciplines.

          Other analysts highlight the opportunities created by 
        globalization. With emerging markets growing rapidly, demand 
        for STEM-intensive products and services will grow. The 
        transfer of complementary activities to lower-cost countries 
        will spur greater demand for STEM workers.

          Offshoring is affecting the pipeline of STEM workers. 
        Undergraduate enrollments in some STEM fields, particularly 
        computer sciences, are down significantly over the past few 
        years in part because students believe these jobs are 
        vulnerable to offshoring.

          Analysts also believe that globalization may inject 
        greater volatility in the STEM job market and workers need to 
        be prepared to re-tool their skills on an ongoing basis.

4. Issues and Concerns

How will the globalization of R&D and innovation affect the supply of, 
and demand for, the STEM workers in America? Most analysts believe that 
globalization will not affect the aggregate number of jobs in the U.S. 
However, it will change the mix of occupations. Certain occupations 
will experience net losses while others will increase and the skills 
demanded will shift. Most analysts believe that the globalization will 
affect the number and mix of STEM workers needed. What do we know about 
the effects so far? Will workers in low-cost countries complement 
American STEM workers thus spurring demand? Or will those workers be 
substitutes for American STEM workers? How will these trends affect the 
STEM-workforce pipeline?

What are the numbers and types of jobs that will face increased 
competition from low-cost countries? Some jobs will move overseas and 
others will stay. What do we know about the types of jobs that are 
likely to be geographically sticky and those that are more footloose? 
Do the economic and trade data provide us an indication of the division 
of labor between America and low-cost countries? What skills will be in 
demand?

Is an inadequate supply of American STEM workers with specific skills 
causing companies to move offshore? Will producing more workers with 
specific skills prevent work from moving offshore?

What kinds of challenges do American STEM workers face in the wake of 
globalization, and what resources do they have to ensure they have 
careers that are both durable and resilient? Many analysts believe that 
globalization will cause greater volatility in the job market. Do STEM 
workers have the right set of tools and the right support to ensure 
they are able to keep their jobs? If they do get displaced are they 
able to quickly re-enter the job market? Do STEM workers face different 
challenges given their specialized knowledge? Incumbent workers face 
increased competition and potentially job and wage loss. What happens 
to those who are displaced?

How has offshoring changed the risks and rewards, costs and benefits, 
of a STEM career? How do we ensure that the next generation of workers 
gets the right kinds of education? What types of skills will be needed 
in the future? Globalization is expected to change the types of work in 
demand in the United States. A number of universities are responding to 
globalization by emphasizing innovation and creativity and de-
emphasizing more technical work, with the expectation that the latter 
can be codified and therefore easier to offshore.

How are countries that are receiving high-skill jobs responding to the 
new opportunities? Can we predict what types of jobs they are actively 
pursuing now and will pursue in the next few years? A common narrative 
of globalization is that lower-skill, labor-intensive jobs will move 
offshore while higher level work will remain in the U.S. Is this 
narrative accurate? Are workers receiving clear labor market signals 
about jobs and skills that will be in demand and those that will be 
rendered obsolete by globalization?
    Chairman Wu. The Committee will come to order, and I want 
to thank everyone for attending this afternoon's hearing on The 
Globalization of Research and Development and Innovation, Part 
IV: Implications for the Science and Engineering Workforce. 
This is the final hearing in a series that the Science and 
Technology Committee launched in June to learn more about how 
the trend toward moving research and development jobs and 
facilities overseas is affecting our nation's economy and 
competitiveness.
    So far this year, we have heard from economists, university 
presidents, industry representatives, and scholars who have 
presented a variety of interesting and sometimes contentious 
views about the topic of globalization of R&D. Next month, the 
Committee staff will release a report summarizing the 
Committee's findings and providing us with some ideas for next 
steps to address the challenges our witnesses have presented.
    Today's hearing focuses on the impact of globalization on 
the American science and engineering workforce. This can 
sometimes be a heated issue. No one wants to think about losing 
their job, and today's science and engineering graduates face 
an uncertain future.
    I am sure everyone here today will agree that we must find 
a way to help our current and future science and engineering 
workers better understand the challenges and opportunities 
facing them in the 21st century. They want to know which jobs 
will stay in the United States, which are likely to move 
overseas, and what types of new opportunities will be created 
through globalization.
    Having to adjust to realities in the labor market is 
nothing new. The information age has made the workforce more 
efficient overall, but also rendered any number of jobs 
obsolete through automation or consolidation or the possibility 
of moving it a far, far distance, offshore.
    Today, some science and engineering jobs are moving 
offshore, and workers here in the United States need to adjust 
or have assistance in that adjustment. Sometimes, that means 
finding a new field or a new company. Other times, it simply 
means learning new skills to remain qualified for those 
positions that stay in the United States.
    The problem is that many workers are often surprised by 
changing job availability, whether those workers are 
experienced professionals approaching retirement or students 
contemplating a science or engineering career. That 
unpredictability hampers decision-making at the individual 
worker level and at the government level. Our witnesses today 
will help answer some of these questions about the scope of 
offshoring, which workers offshoring is most likely to affect, 
and how current science and engineering workers are responding 
to the challenges and opportunities of globalization.
    I am glad that we have a representative of industry with us 
today to help us understand the business perspective on these 
workforce issues. Businesses today often are not simply 
employers. They provide education, training, and influence the 
types of education that tomorrow's innovative scientists and 
engineers receive at our universities today. I am hoping to 
learn more about the types of skills that industry will expect 
the next generation of workers to have so that we can make 
policy decisions that make students more competitive in a 
global economy.
    The United States' science and engineering workforce is the 
best in the world. Today's hearing will help us better 
understand how to match workers' skills and abilities with 
employers' needs, thereby ensuring that it remains that way for 
years to come.
    [The prepared statement of Chairman Wu follows:]
                Prepared Statement of Chairman David Wu
    I want to thank everyone for attending this afternoon's hearing on 
The Globalization of R&D and Innovation, Part IV: Implications for the 
Science and Engineering Workforce. This is the final hearing in a 
series that the S&T Committee launched in June to learn more about how 
the trend towards moving R&D jobs and facilities overseas is affecting 
our nation's economy and competitiveness.
    So far this year, we've heard from economists, university 
presidents, industry representatives, and scholars who have presented a 
variety of interesting--and sometimes contentious--views about the 
topic of globalization. Next month, the Committee staff will release a 
report summarizing the Committee's findings and providing us with some 
ideas for next steps to address the challenges our witnesses have laid 
out.
    Today's hearing focuses on the impacts of globalization on the 
American science and engineering workforce. This can sometimes be a 
heated issue. No one wants to think about losing their job, and today's 
science and engineering graduates face an uncertain future.
    I'm sure everyone here today will agree that we must find a way to 
help our current and future science and engineering workers better 
understand the challenges and opportunities facing them in the twenty-
first century. They want to know which jobs will stay in the U.S., 
which are likely to move overseas, and what types of new opportunities 
will be created through globalization.
    Having to adjust to realities in the labor market is nothing new. 
The information age has made the workforce more efficient overall, but 
also rendered any number of jobs obsolete through automation or 
consolidation or offshoring.
    Today, some science and engineering jobs are moving offshore, and 
workers here in the United States need to adjust. Sometimes, that means 
finding a new field or a new company. Other times, it simply means 
learning new skills to remain qualified for those positions that stay 
in the U.S.
    The problem is that many workers are often surprised by changing 
job availability, whether those workers are experienced professionals 
approaching retirement or students contemplating a science or 
engineering career. That unpredictability hampers decision-making at 
the individual worker level and at the government level. Our witnesses 
today will help answer some of these questions about the scope of 
offshoring, which workers offshoring is most likely to affect, and how 
current science and engineering workers are responding to the 
challenges and opportunities of globalization.
    I'm also glad that we have a representative of industry with us 
today to help us understand the business perspective on these workforce 
issues. Businesses today often are not simply employers. They provide 
education and training, and influence the types of education that 
tomorrow's innovative scientists and engineers receive at universities. 
I'm hoping to learn more about the types of skills that industry will 
expect in the next generation of workers so that we can make policy 
decisions that make students more competitive.
    The U.S. science and engineering workforce is the best in the 
world. Today's hearing will help us better understand how to match 
workers' skills and abilities with employers' needs, thereby ensuring 
it remains that way for years to come.

    Chairman Wu. And with that, I would like to recognize my 
friend and colleague, Dr. Gingrey, for his opening statement.
    Mr. Gingrey. Good afternoon, Chairman Wu. I want to first 
thank you indeed for holding this fourth hearing on the issue 
of offshoring that will address the implications for the 
science and engineering workforce.
    It is well-documented that the United States has a very 
extensive history of scientific innovation that has benefited 
engineers and scientists as well as our nation's economy. Over 
the years, engineers and scientists have developed products and 
technologies that have raised the standard of living in our 
nation. In return, engineers and scientists have been rewarded 
for their efforts with abundant employment opportunities, 
excellent salaries, and a quality of life and substantial 
public respect, I might add.
    The advent of globalization is in part jeopardizing this 
mutually beneficial relationship. A 2003 McKenzie Global 
Institute report estimates that 52 percent of engineering jobs 
are amenable to offshoring. This, along with the 2003 spike in 
unemployment among engineers and computer scientists, have led 
to feelings of widespread anxiety in these professions. For 
example, electrical engineers have become so concerned about 
their careers, that a 2006 IEEE survey showed only 13 percent 
of the engineers responded that prospects for long-term demand 
for engineers in the United States were excellent, and 18 
percent responded that the prospects were poor. What is even 
more alarming, Mr. Chairman, is the same survey showed that 
only 37 percent, let me repeat only 37 percent of these 
engineers would recommend engineering as a profession to their 
children, and a staggering 35 percent would not recommend 
engineering at all. As a physician of 31 years, I can't say I 
enthusiastically encouraged my four children to enter the 
practice and profession of medicine. I didn't discourage them, 
but I didn't encourage them either. And by the way, none of 
them followed in my footsteps.
    While there is certainly some disillusionment among today's 
engineers and scientists on the prospects of the innovation 
industry in the United States, our country has also had the 
benefit for the past several years of foreign companies in-
sourcing jobs here in the United States. This phenomenon occurs 
when a foreign-based company establishes a subsidiary here in 
our country that provide jobs for hardworking American 
citizens, good jobs.
    Mr. Chairman, in a 15-year window, from 1987 to 2002, jobs 
created as a result of in-sourcing have jumped from 2.6 million 
to 5.4 million and continued to increase. In-sourcing has also 
provided an infusion in our economy by accounting for 20 
percent of the United States' exports. In 2003 alone, foreign 
companies reinvested $38.6 billion in their American 
operations. That is a substantial number. United States 
subsidiaries also serve as an important component to domestic 
R&D activities. According to Dartmouth College President, 
Matthew Slaughter, United States subsidiaries have spent $27.5 
billion on domestic R&D, increasing its share of R&D activities 
to 14 percent.
    Mr. Chairman, in my own State of Georgia, foreign-owned 
subsidiaries provide more than 190,000 high-paying jobs to our 
residents of the great State of Georgia. They provide the 
livelihood for 5.7 percent of Georgia's private sector 
workforce. This is an increase of over 18 percent in just five 
years. Additionally, over one-third of the jobs subsidiaries 
bring to Georgia are in the manufacturing sector. This is so 
important. I have a lot of textile and other manufacturing 
activities in the 11th District of Georgia.
    Columbia University Professor Jeffrey Sachs goes so far as 
to say, and this is a quote, ``there is no other fundamental 
mover of economic development than science and technology.''
    Chairman Wu, I could not agree more with that statement, 
and I am proud of the progress that this committee has made 
through the America COMPETES Act to increase STEM education, 
science, technology, engineering, and math, for America's youth 
as a way to provide incentives for domestic companies to stay 
here, right here at home. At the same time, though, we need to 
explore what can be done to bring more foreign-owned companies 
to our country to provide these high-paying jobs to hardworking 
Americans.
    Mr. Chairman, I look forward to hearing today's testimony 
from our esteemed panel on the solutions that they have that 
will enable us to maintain and grow an engineering and 
scientific workforce that will indeed keep us the world leader 
in technology and innovation; and with that, Mr. Chairman, I 
yield back to you.
    [The prepared statement of Mr. Gingrey follows:]
           Prepared Statement of Representative Phil Gingrey
    Good Afternoon Mr. Chairman. I want to first thank you for holding 
this fourth hearing on the issue of offshoring that will address the 
``Implications for the Science and Engineering Workforce.'' It is well 
documented that the United States has a very extensive history of 
scientific innovation that has benefited engineers and scientists--as 
well as the Nation's economy. Over the years, engineers and scientists 
have developed products and technologies that have raised the standard 
of living in our nation. In return, engineers and scientists have been 
rewarded for their efforts with abundant employment opportunities, 
excellent salaries and quality of life, and substantial public respect.
    The advent of globalization is--in part--eopardizing this mutually 
beneficial relationship. A 2003 McKinsey Global Institute report 
estimates that 52 percent of engineering jobs are amenable to 
offshoring. This, along with the 2003 spike in unemployment among 
engineers and computer scientists have led to feelings of widespread 
anxiety in these professions. For example, electrical engineers have 
become so concerned about their careers that a 2006 IEEE survey showed 
only 13 percent of the engineers responded that prospects for long-term 
demand for engineers in the U.S. were excellent--and 18 percent 
responded that the prospects were poor. What's even more alarming Mr. 
Chairman is the same survey showed that only 37 percent would recommend 
engineering as a profession to their children--and a staggering 35 
percent would not recommend engineering at all.
    While there is certainly some disillusionment among today's 
engineers and scientists on the prospects of the innovation industry in 
the United States, our country has also had the benefit for the past 
several years of foreign companies ``in-sourcing'' jobs here in the 
U.S. This phenomenon occurs when foreign-based companies establish 
subsidiaries in our country that provide jobs for hardworking American 
citizens.
    Mr. Chairman, in a fifteen year window from 1987 to 2002, jobs 
created as the result of in-sourcing have jumped from 2.6 million to 
5.4 million. In-sourcing has also provided an infusion in our economy 
by accounting for 20 percent of U.S. exports. In 2003 alone, foreign 
companies reinvested $38.6 billion in their American operations.
    U.S. subsidiaries also serve as an important component to domestic 
R&D activities. According to Dartmouth College Professor Matthew J. 
Slaughter, U.S. subsidiaries have spent $27.5 billion on domestic R&D, 
increasing its share of R&D activities to 14 percent.
    Mr. Chairman, in my own State of Georgia, foreign-owned 
subsidiaries provide more than 190,000 high paying jobs to our 
residents. They provide the livelihood for 5.7 percent of Georgia's 
private-sector workforce. This is an increase of over 18 percent in 
just five years. Additionally, over one-third of the jobs that 
subsidiaries bring to Georgia are in the manufacturing sector.
    Columbia University professor Jeffrey Sachs goes so far as to say 
``There is no other fundamental mover of economic development than 
science and technology.'' Mr. Chairman, I could not agree more with 
that statement, and I am proud of the progress that this committee has 
made through the America COMPETES Act to increase STEM education for 
America's youth as a way to provide incentives for domestic companies 
to stay here at home. At the same time, we need to explore what can be 
done to bring more foreign-owned companies to our country to provide 
these high paying jobs to hardworking Americans.
    Mr. Chairman, I look forward to hearing today's testimony from our 
esteemed panel on the solutions they have that will enable us to 
maintain and grow an engineering and scientific workforce that will 
keep us the world leader in technological innovation. With that Mr. 
Chairman, I yield back.

    Chairman Wu. Thank you very much, Dr. Gingrey. I can report 
to you that the grass is always greener. I was riding in an 
elevator with a colleague in a law firm, this feels like 
decades ago now, but he said he wouldn't encourage any of his 
kids to become an attorney; and I thought, boy, that is kind of 
sad. And as you may know, Dr. Gingrey, I was a failure at your 
profession. I went to one year of medical school and then as 
far as I know, I am still on a leave of absence from that 
medical school and then trained as an attorney. And you know, 
the only thing that prevented me from switching from law school 
to medical school is that I had been there before. So the grass 
always is greener, and I suppose that----
    Mr. Gingrey. Mr. Chairman, when you said the grass is 
greener, I thought for sure you were referring to Oregon versus 
Georgia. You guys are getting all the rain these days. But what 
you didn't know is I actually took the LSAT, and I scored 
really high on it; and I thought about going to law school just 
for maybe 30 seconds.
    Chairman Wu. Well, you know, we are in story-telling time 
now, and you know, I took the LSATs purely to prepare for the 
MCATs. And little did I know that I was actually going to use 
the score some day. So life is uncertain which I think is the 
theme of this hearing. Life is uncertain and preparation for 
the future is very, very important; and I think that is what 
many of our witnesses will address.
    [The prepared statement of Mr. Mitchell follows:]
         Prepared Statement of Representative Harry E. Mitchell
    Thank you, Mr. Chairman.
    Today's hearing raises important questions about the impact of 
globalization on the technical job market in the United States.
    As the economies of the world become more intertwined, we need to 
ensure that America's participation in the global economy does not 
lower the standard of living for American workers.
    While there is a consensus that the number of jobs available will 
not change, it is essential that we understand how globalization may 
impact the type of jobs available. This means that we must continue to 
educate workers with the necessary skills to perform STEM jobs.
    Offshoring is increasing at a rapid rate in certain industries and 
is this trend is expected to continue. It is our job as lawmakers to 
carefully assess the current situation and hear from experts in the 
field to consider what our future actions should be.
    I look forward to today's testimony, and I yield back the balance 
of my time.

    [The prepared statement of Mr. Smith follows:]
           Prepared Statement of Representative Adrian Smith
    Thank you, Mr. Chairman. Globalization affects Americans and 
Nebraskans every day, and I am pleased we are holding this hearing to 
learn more about its impacts on research and development.
    As we well know, thanks to author Thomas Friedman, the world is 
indeed flat. The playing field around the world is increasingly level--
and research and development is no exception. American innovations and 
advances in technology have played a major role in the flattening of 
the world. Now, we must work hard to maintain our edge in science and 
engineering.
    Countries around the world, from Brazil to China, from India to 
Estonia, are gearing up to become keen competitors in research and 
development. Many of the scientists they seek to attract are trained 
right here in the United States of America. As Americans, we can, and 
should, work together with the international community of scientists 
and engineers. But it is vital to our nation's economy, not to mention 
our national security, that we ourselves remain a world leader in 
science and technology.
    Earlier this year, Congress passed the American COMPETES Act, a 
first step toward ensuring our nation's competitiveness in the fields 
of science, technology, engineering, and mathematics. I am a co-sponsor 
of the Investment in American Act of 2007, which would increase from 12 
to 20 percent the rate of the alternative simplified tax credit for 
research expenses; make permanent the tax credit for increasing 
research activities; and repeal the alternative incremental tax credit 
for research expenses. We need to take further action to ensure that 
top science and engineering talent remains in the U.S. in the future.
    I look forward to hearing the testimony of our witnesses.
    Thank you, Mr. Chairman, and I look forward to working with you in 
the future.

    Chairman Wu. I would like to introduce our witnesses today.
    First, Dr. Michael S. Teitelbaum who is Vice President of 
the Alfred P. Sloan Foundation; Dr. Charles McMillion who is 
President and Chief Economist of MBG Information Services; Dr. 
Harold Salzman is Senior Research Associate at the Urban 
Institute; Mr. Paul Kostek is Vice President for Career 
Activities at the Institute for Electrical and Electronics 
Engineers; and Mr. Henry Becker is President of Qimonda North 
America.
    As our witnesses know, please try to keep your oral 
testimony to five minutes and your written testimony will be 
entered fully into the record; and before we start with Dr. 
Teitelbaum, let me say that I think we are about to be 
interrupted by a series of floor votes which may take 30 
minutes or so, and let me apologize to the panel and the 
attendees, but these interruptions just can't be helped. Let me 
apologize in advance. When votes are called, we will pause at 
that point and resume as quickly as possible. And with that, 
Dr. Teitelbaum, please begin.

STATEMENT OF DR. MICHAEL S. TEITELBAUM, VICE PRESIDENT, ALFRED 
                      P. SLOAN FOUNDATION

    Mr. Teitelbaum. Well, thank you, Mr. Chairman, Congressman 
Gingrey, Members of the Committee, Committee staff, ladies and 
gentlemen, thank you for holding this hearing and thank you for 
inviting me to appear before you. It is nice to be back on the 
Hill; and your comment, Mr. Chairman, about roll call votes is 
very reminiscent of my experience for two years on the Hill as 
Staff Director of the House Select Committee on Population. 
Unpredictable, uncontrollable, but real.
    I should start by saying that my testimony is my own 
professional opinion, not necessarily the opinions of the 
Alfred P. Sloan Foundation; so you should understand these are 
my personal evaluations of the questions that your staff have 
posed to the panel.
    Given the short time available for oral testimony, I am 
going to limit myself to five points. There is a good deal more 
in the written testimony you received. And I am going to have 
to be declarative and uncomplicated in making these five points 
because these are all very complicated issues, and they each 
deserve five minutes or more, but I can't do that.
    My first point is that it is only fair to say up front that 
we actually do not know how much of U.S. origin R&D has been 
globalized so far, much less do we know how this will change in 
the future. The offshoring of these services is itself quite 
new, and it is very difficult to measure. The quantitative data 
we have are remarkably weak, and even worse in a way, they lag 
well behind what seems to be a rapidly changing scene.
    U.S.-based companies that, at least according to press 
reports are energetically offshoring R&D investments to 
countries such as China and India seem to be very cautious 
about talking publicly about what they are doing. Now, most 
observers believe that the globalization of R&D are increasing 
and increasing fairly rapidly. But again, we don't have good 
quantitative data on this, and the trend is attributed to 
numerous incentives including some obvious ones: lower 
remuneration rates for scientists and engineers; heavy 
marketing of offshoring services by international consulting 
firms; the desire of U.S.-based firms to tailor product 
development to non-U.S. markets; U.S. tax provisions--that is 
something that Congress does actually have some leverage on 
provisions that allegedly perversely favor offshore investment 
of accrued profits in attractive capital and other subsidies 
offered by overseas governments for R&D; and even mandates to 
locate R&D operations therefore imposed by governments of some 
major countries such as China. And then there is federal 
support of both U.S.-trained foreign students and temporary 
work visas that facilitate offshore outsourcing of R&D and 
other high-skill services. These are all plausible but we can't 
really dissect them and tell you 12.34 of the trend is due to 
this one and .27 to that.
    As is always the case, we know even less about the future 
than about the present and the recent past. So will the 
apparent rapid growth of R&D offshoring continue, or even 
accelerate? We don't know. Will firms decide that payoffs they 
had anticipated were overstated or that the risks they had 
planned for were underestimated? To what extent might R&D 
funding originating outside the United States provide career 
opportunities for U.S. scientists and engineers? We don't have 
answers to that. They are critically important topics for this 
committee, and I sincerely hope that you will pay a lot of 
attention to them over the coming years.
    My second point is that although I know that you are 
routinely told by corporate lobbyists that their R&D is being 
globalized in part due to shortages of scientists and engineers 
or it will be if they continue to experience such shortage, no 
one who has studied this matter with an open mind has been able 
to find any objective data showing such general shortages of 
scientists and engineers. And here I include many academic 
researchers as well as several studies by the RAND Corporation 
and other think tanks commissioned by federal funds. That is 
point two. You have a vote.
    Point three. The best evidence is that large fractions of 
U.S. college freshmen continue to be interested in pursuing 
majors in science and engineering. However, more than one-half 
of these change their minds once they begin their degrees, and 
move towards other studies and careers.
    Fourth, we need to face that there is a serious disconnect 
between labor market demand for science professionals and the 
way federal funding is used to subsidize graduate science 
education and post-doctoral positions. This disconnect----
    Chairman Wu. I am sorry, Dr. Teitelbaum, but we had an old 
system of bells which I found charming. These new horns are 
terribly offensive, and I lost your last sentence which I 
think----
    Mr. Teitelbaum. Okay. I will say it again.
    Chairman Wu. Thank you.
    Mr. Teitelbaum. We need to face that there is a serious 
disconnect between labor market demand for science 
professionals--I am not speaking now about engineers--and the 
way federal funding is used to subsidize graduate science 
education and post-doctoral positions. This disconnect between 
demand and supply means that we are subsidizing substantially 
more science Ph.D.s, in my judgment--Ph.D. students, and post-
docs--than can find attractive real job openings and future 
careers in these fields.
    Our current model works roughly like this. If you vote in 
this committee and elsewhere in the Congress to substantially 
increase federal funding for basic research, one side-effect 
not intended by you is substantial growth in the number of 
``slots'' for Ph.D. students and post-docs supported by the 
additional research funding you voted. Yet this increased 
research funding does not result in commensurate increases in 
career pathways for scientists once they finish their post-
docs.
    So this is a recipe for self-defeating instability, for 
enthusiastic booms followed by depressing busts. Some of the 
most rapid growth in the federally-subsidized science workforce 
has been in the category of post-doc. If the truth be told, 
only a very small percentage of the current post-doc pool seems 
to have realistic prospects of gaining the regular academic 
positions that they aspire to.
    Does this mean that I believe it was unwise for this 
committee and the Congress to authorize increased federal 
support for K-12 science and math teaching, or for basic 
research in the physical sciences? To the contrary. My own view 
is that K-12 success in science and mathematics has become as 
important for both economic success and an educated citizenry 
as were basic reading and writing skills in the 19th and 20th 
centuries. And for basic research, my view is that such 
research produces valuable ``public goods'' that contribute 
powerfully to human welfare. Most corporate leaders say openly 
they cannot invest very much in basic research because it's 
difficult to capture the profits from it, and this alone makes 
basic research a very appropriate role for government. This 
leads me to my fifth and final point.
    We need much more thoughtful attention to how the current 
federal funding system for graduate education might be 
gradually adjusted to better connect to the labor market 
demands for science professionals. There is strikingly little 
federal support for such analyses, and some small funding could 
go a long way to improve our understanding.
    Now, I am going to skip over this because of time, and say 
one important adjustment would be to find practical ways to 
improve the fit between graduate science education and 
employment paths for science professionals outside academe. 
With this goal in mind, the Alfred P. Sloan Foundation has been 
investing millions of dollars of our money to assist you and 
U.S. universities in creating innovative Professional Science 
Master's degrees, known as PSM degrees. These are graduate-
level science degrees designed in consultation with employers 
who provide guidance to the faculty on both the scientific and 
the business skills they consider critical for their new hires. 
They are designed to produce sophisticated science-trained 
professionals who are interested in non-academic careers in 
science and whose skills are of interest to non-academic 
employers, both corporate and governmental. There are now over 
100 such degree programs offered by over 50 universities in 25 
states, and there is a website I cite in my testimony that will 
give you a lot more information on them.
    I just want to close by saying, Mr. Chairman, that I was 
pleased to see that in the America COMPETES Act the Congress 
provided the first authorization of federal funds to support 
these Professional Science Master's initiatives through the 
National Science Foundation. Of course, I understand, having 
been here for two years, that these authorized funds still need 
to be appropriated. Still, it is my hope that the National 
Science Foundation right now is actively planning how to move 
forward energetically building this and other promising 
graduate pathways that will improve the fit of U.S. graduate 
science education to the needs of the U.S. economy.
    That is really all I can discuss in the short time 
available. I am ready to respond to Members' questions to the 
best of my ability, and I will be happy to provide you any 
further information subsequently. Thank you very much.
    [The prepared statement of Dr. Teitelbaum follows:]
              Prepared Statement of Michael S. Teitelbaum
Mr. Chairman, Members of the Subcommittee, Ladies and Gentlemen:

    Thank you for inviting me to share with you my thoughts on the 
fascinating questions you and your staff have raised regarding the U.S. 
science and engineering workforce, and the implications of globalizing 
R&D for its future dynamism and productivity.
    By way of introduction, I am Vice President of the Alfred P. Sloan 
Foundation in New York, a philanthropic foundation created in the 1930s 
that has long devoted substantial funding to improving the health of 
U.S. science, engineering, and economic performance. Over the past few 
years, the Sloan Foundation has supported a number of research projects 
and data collections by leading analysts that address your questions. 
At a personal level, I should add that I am myself a demographer who 
has spent a good deal of time in recent years examining some of the 
questions you are raising. Twenty-five years ago I served as the Staff 
Director of the Select Committee on Population of this House. Today I 
am appearing before you in my personal professional capacity. The Sloan 
Foundation as an institution takes no positions on these issues.
    Others on the panel will address the forces underlying 
globalization and possible future trends. In the short time available 
to me, I will focus on what we are often told--as distinct from what we 
actually know--about the sufficiency of the U.S. science and 
engineering workforce for the current and future R&D enterprise, and I 
will also offer some more speculative comments on the possible impacts 
of globalization trends.

The Conventional Portrait

    Let me first, very briefly, summarize what I would call the 
Conventional Portrait. It will be very familiar to Members of this 
subcommittee; I know you have had many witnesses before you who have 
put forward such views. The Conventional Portrait may be summarized 
briefly as follows:
    First, there are serious shortages or shortfalls in the U.S. of 
scientists and engineers--either current shortages/shortfalls, or 
``looming'' ones--that bode ill for the creativity and competitiveness 
of the U.S. economy.
    Second, the numbers of newly-educated scientists and engineers 
graduating from U.S. universities are reported to be insufficient for 
the needs of U.S. employers, even though the science careers they are 
offering are growing rapidly and are attractive and well-remunerated. 
Some argue that it is this insufficiency that really compels U.S. high-
tech firms to offshore increasing fractions of their R&D work, and to 
hire increasing numbers of scientists and engineers from abroad to 
``fill the gaps.''
    Third, the argued insufficiencies of supply are due to the weakness 
(or even ``failure'') of U.S. K-12 education in science and math.
    Fourth, U.S. students are showing declining interest in science and 
engineering careers, even though these are growing strongly.
    Fifth, the ``postdoc'' status found in growing numbers in most U.S. 
research universities offers an excellent training opportunity for 
young scientists before they enter into the promising academic research 
careers that lie before them.
    Sixth, the Congress should respond to these realities by providing 
large government investments to increase the number of students 
completing majors in science and engineering fields, and in increasing 
the flow of federal research dollars to these fields.
    Two prominent examples of such portraits can easily be found in the 
2005 report Tapping America's Potential, led by the Business Roundtable 
and signed onto by 14 other business associations; and by the 2006 
National Academies report Rising Above the Gathering Storm, which was 
the basis for substantial parts of what eventually evolved into the 
American COMPETES Act. The 2005 Tapping America's Potential report 
called for an array of policies and expenditures to ``double the number 
of science, technology, engineering, and mathematic graduates by 
2015,'' i.e., a 100 percent increase in 10 years. They were very 
forthright about this; this core goal appeared right on the report's 
cover.




The Realities

    I have described such views as ``Conventional,'' but unfortunately 
that does not mean they are correct. To the contrary, they are largely 
inconsistent with the facts. The realities--highlighted by the findings 
of most researchers who have addressed this subject with an open mind--
are very different from the Conventional Portrait; indeed in important 
ways they are almost the opposite. Here is a similarly brief summary of 
the findings from such research:
    First, no one who has come to the question with an open mind has 
been able to find any objective data suggesting general ``shortages'' 
of scientists and engineers. The RAND Corporation has conducted several 
studies of this subject; its conclusions go further than my summary 
above, saying that not only could they not find any evidence of 
shortages, but that instead the evidence is more suggestive of 
surpluses. I would add here that these findings of no general shortage 
are entirely consistent with isolated shortages of skilled people in 
narrow fields or in specific technologies that are quite new or growing 
explosively.
    Second, there are substantially more scientists and engineers 
graduating from U.S. universities that can find attractive career 
openings in the U.S. workforce. Indeed science and engineering careers 
in the U.S. appear to be relatively unattractive--relative that is to 
alternative professional career paths available to students with strong 
capabilities in science and math.\1\
---------------------------------------------------------------------------
    \1\ There are many journalistic reports of senior scientists and 
engineers advising students, including their own children, not to 
pursue careers in these fields. . ..
---------------------------------------------------------------------------
    Third, students emerging from the oft-criticized K-12 system appear 
to be studying science and math subjects more, and performing better in 
them, over time. Nor are U.S. secondary school students lagging far 
behind comparable students in economically-competitive countries, as is 
oft-asserted.
    Fourth, large and remarkably stable percentages of entering 
freshmen continue to report that they plan to complete majors in 
science and engineering fields; however, only about half of these 
ultimately do so.
    Fifth, the postdoc population, which has grown very rapidly in U.S. 
universities and is recruited increasingly from abroad, looks more like 
a pool of low-cost research lab workers with limited career prospects 
than a high-quality training program for soon-to-be academic 
researchers. Indeed, if the truth be told--only a very small percentage 
of those in the current postdoc pool have any realistic prospects of 
gaining a regular faculty position.
    Sixth, rapid increases in federal funding for scientific research 
and education is more likely than not to further destabilize career 
paths for junior scientists. Under the current structure, the effect is 
substantial growth in ``slots'' for Ph.D. students and postdocs to 
conduct the supported research, but only limited increases in the 
numbers of career positions (I will give you a concrete and large 
example in a moment).
    There are many researchers and organizations that have developed 
this set of understandings of what is actually happening--for example: 
leading researchers at the RAND Corporation; Harvard University; 
National Bureau of Economic Research; Urban Institute; Georgetown 
University; Georgia State University; Stanford University; etc. I'll be 
happy to provide your staff with a bibliography of the now-substantial 
body of research and analysis that comes broadly to this set of 
conclusions.

Why is the Conventional Portrait a Washington Perennial?

    So why, you might ask, do you continue to hear energetic re-
assertions of the Conventional Portrait of ``shortages,'' shortfalls, 
failures of K-12 science and math teaching, declining interest among 
U.S. students, and the necessity of importing more foreign scientists 
and engineers?
    In my judgment, what you are hearing is simply the expressions of 
interests by interest groups and their lobbyists. This phenomenon is, 
of course, very familiar to everyone on the Hill. Interest groups that 
are well organized and funded have the capacity to make their claims 
heard by you, either directly or via echoes in the mass press. 
Meanwhile those who are not well-organized and funded can express their 
views, but only as individuals.
    The interest groups that continue to make the Conventional case 
include:

          Some employers of scientists and engineers, and their 
        industry associations [ample pools of qualified hires, without 
        need to raise wages and benefits?]

          Some universities and university associations 
        [graduate student enrollments and postdocs to conduct funded 
        lab research?]

          Some funding agencies [credible argument for 
        increased funding?]

          Some immigration lawyers and their associations 
        [high-volume visas, with legal fees paid by employers?]

I want to emphasize that in making this case, none of these interest 
groups intend any harm to anyone. There is no evil intent, nor 
malevolence, nor exploitation. They are simply promoting their 
interests, as interest groups should be expected to do.
    Yet there are few (if any) organized groups that represent the 
career interests of professional scientists or engineers--not to 
mention the future interests of people who are still students and who 
might, or might not, choose to pursue such careers.
    So when you hear from interest groups about this range of subjects, 
you pretty much hear only from employers and their associations, 
universities and their associations, funding agencies, and immigration 
lawyers and their associations. There are exceptions to this, but they 
are few in number and often tightly constrained about lobbying you.

The Perverse Funding Structure for Science Graduate Education

    Let me turn now to one of the perverse aspects of the way funding 
for science is currently structured. Given the short time available, I 
must simplify (I hope I do not over-simplify). Put simply, the way we 
currently fund graduate education in science is a recipe for 
instability, for enthusiastic booms followed by dispiriting busts. Let 
me illustrate by reference to NIH and the biomedical sciences.
    Many of you may be aware that a large majority of biomedical Ph.D. 
students and postdocs supported by NIH are financed by research grant 
funds, rather than by ``training'' or education funds. This was not the 
case 25 years ago, but it is now. This means that if NIH research 
funding is increased in response to too-low success rates for grant 
applicants, one effect is funding for more Ph.D. students and postdocs 
who are recruited by NIH grant recipients to do the bench research 
work. This means that, after a lag of several years, there will be more 
recent Ph.D.s and postdocs seeking research employment, and applying 
for NIH research grants. This in turn tends to reduce the grants 
success rate going forward.
    Something exactly like this is now underway--with a vengeance--in 
the biomedical research sector. In part due to low and declining 
success rates, and special concern about the especially difficult 
experiences of younger scientists, Congress increased the NIH research 
budget by 100 percent in only the five years from 1998-2003--on the 
order of 14-15 percent annual increases. The absolute increase was also 
large: from $13.6 billion to $27.3 billion. If inflation is taken into 
account, the ``real'' percent and absolute increases were of course 
lower, but still very large.
    Following the promised doubling, NIH budget growth has stagnated 
since 2003. The result is what many in the biomedical field are calling 
a ``hard landing,'' and what others call a ``funding crisis.'' 
Researchers are spending more and more of their time writing proposals, 
the stability of research careers is imperiled, and some labs face the 
prospect of closing down.
    Much of what is now happening was not only foreseeable, but was 
actually foreseen. Dynamic modeling of the U.S. Ph.D. and research 
funding systems undertaken by Goldman and Massy\2\ at Stanford and RAND 
during the 1990s demonstrated (for all who cared to see) that:
---------------------------------------------------------------------------
    \2\ Charles A. Goldman and William F. Massy, The PhD Factory: 
Training and Employment of Science and Engineering Doctorates in the 
United States (Boston: Anker Publishing, 2001). The research on which 
this book was based was supported by a peer-reviewed grant from the 
Alfred P. Sloan Foundation.

          University departmental needs drive intake of Ph.D.s 
---------------------------------------------------------------------------
        (p. 20)

          Ph.D. admissions are insensitive to external labor 
        market conditions (p. 22)

          Simulations of five years of research funding growth 
        at two percent per year followed by stable funding produces a 
        short-term increase in employment for recent Ph.D.s, followed 
        within a few years by declines in employment for recent Ph.D.s 
        (pp. 42ff).

    An unrelated but prescient article by prominent observers of the 
biomedical research scene, published by Science magazine in 2002, 
anticipated correctly what was to take place several years later, 
following the final 14 percent budget increase in 2003. The authors 
estimated that given the nature of the NIH biomedical research funding 
structure, continuous annual budget increases of at least six to eight 
percent would be required to maintain stability and avoid serious 
negative consequences.\3\
---------------------------------------------------------------------------
    \3\ David Korn, et al., ``The NIH Budget in the ``Postdoubling'' 
Era, Science, Vol. 296, 24 May 2002, pp. 1401-1402.
---------------------------------------------------------------------------
    One way to describe the system we have evolved is one with 
``positive feedback loops'' built right into it--unintentionally, to be 
sure--a bit like a cockeyed thermostat that responds to rising 
temperatures not by shutting off the furnace but instead by calling for 
more heat. In all systems analyses of which I am aware, positive 
feedback loops like this tend toward unstable equilibria--if funding 
growth is rapid enough, one can readily foresee there will be boom 
first, followed by bust, unless rapid budget increases can be continued 
indefinitely.
    One important lesson from the recent NIH case is that one of the 
fundamental goals of doubling the budget--to increase success rate of 
proposals, especially for younger scientists--was frustrated by the 
positive feedback loops inherent in the current funding structure. 
Funding success rates and career prospects did improve somewhat during 
the five years of rapid budget increases, but once the doubling had 
been completed proposal success rates quickly declined--to levels even 
lower than before the budget doubling began. And the largest negative 
effects seem to have been concentrated among younger biomedical 
scientists, who represent the future of the research enterprise.\4\
---------------------------------------------------------------------------
    \4\ An excellent presentation on the NIH situation, presented at 
Harvard University last February by Dr. Paula Stephan of Georgia State 
University can be found at: http://nber15.nber.org/sewp/
Early%20Careers%20for%20Biomedical%20Scientists.pdf

What Should NOT Be Done?

    The NIH case may not tell us what should be done now, but it does 
offer valuable insights into what should NOT be done. It also points to 
(again) foreseeable problems if the current structure remains unchanged 
and Congress carries through with the increased appropriations for NSF, 
Department of Energy and NIST foreshadowed in recent authorizations. I 
do hope this Committee will give some scrutiny to how repeats of the 
current rebound crisis from the NIH budget doubling can be avoided if 
the science funding budgets of these other agencies are doubled in the 
coming years.
    What should NOT be done is to take actions that will increase the 
supply of scientists and engineers that are not intimately coupled with 
serious measures to ensure that comparable increases occur in the 
demand for scientists and engineers. A supply-side-only focus--various 
advocates are lobbying for sharply increased research funding, more 
incentives for science and engineering students, more temporary or 
permanent visas for scientists and engineers, etc.--might satisfy the 
demands of influential interest groups over the short-term. But if the 
overall structure currently in place is not modified, one can 
reasonably anticipate that the positive feedback loops in the current 
system will produce destructive effects over the medium-term--
deteriorating grant success rates, and declining interest in science 
and engineering studies and careers among domestic students.

Implications of R&D Globalization

    What can we say about the implications of quite recent trends 
toward globalization of R&D activities by U.S.-based employers? The 
first thing is to acknowledge that we don't really know in any detail 
what is happening now, and certainly not what is going to happen over 
the next five to ten years. Only a decade ago, no one would have 
forecast the rapidity with which it has become feasible and financially 
attractive for U.S. firms to out-source their R&D activities to low-
wage offshore settings such as India and China. The general assumption 
then was that low-skill, low-wage manufacturing could and would be 
offshored, but that high-value-added R&D functions would remain in the 
U.S.
    Clearly such confidently-asserted assumptions have proven to be 
false. However, the data as to the actual magnitudes and growth of such 
offshoring are very limited indeed, and the information we do have lags 
well behind the rapid pace at which such change seems to be occurring.
    It has long been the case that no one has been able to accurately 
forecast future labor market demand for highly-educated scientists and 
engineers more than a few years into the future--as an outstanding 
National Academies report on the topic concluded forcefully in 2000.\5\ 
Such forecasting efforts have become far more difficult as a result of 
the quite-recent movement toward offshoring of high-level R&D 
activities, led by many U.S.-based companies and consulting firms.
---------------------------------------------------------------------------
    \5\ National Research Council, Office of Scientific and Engineering 
Personnel, Forecasting Demand and Supply of Doctoral Scientists and 
Engineers: Report of a Workshop on Methodology (Washington: National 
Academies Press, 2000).
---------------------------------------------------------------------------
    One result is that the risks and uncertainties of pursuing a STEM 
career in the U.S. are rising. If one combines the erratic paths and 
future uncertainties of R&D funding flows from the Federal Government, 
the boom/bust cycles that characterize many important high-tech 
industries, the uncertainties of federal visa legislation, and the 
apparent rising trend in offshore out-sourcing of R&D, it is very hard 
indeed to offer useful advice about the future prospects for a STEM 
career to a student with strong abilities and real interest in math and 
science. Certainly we can offer no assurances that they will find a 
``durable and resilient career path'' in such fields.

What Should Be Done?

    One thing that could and should be done is to dramatically improve 
the ``signals'' about such careers that are publicly available to 
prospective students. In particular, doctoral programs in many U.S. 
universities provide far less information to prospective and entering 
students about the career experiences of their recent graduates than do 
the law schools and business schools on the very same campuses. This 
should certainly change; students need to be provided with far better 
if they are to have realistic expectations as they embark upon a course 
of graduate study and postdoc research that often can stretch out over 
most of their 20s.
    A second promising approach is to improve the direct connections 
between science employers and universities offering graduate science 
degrees. This is one of the fundamental elements of the Professional 
Science Master's degree programs that the Sloan Foundation has been 
supporting around the country. Typically these degrees involve two 
years of intensive graduate-level course work in relevant scientific 
fields, combined with courses in so-called ``plus'' skills that 
employers routinely report they seek in new hires: skills in 
communication, management, teamwork, leadership, entrepreneurship, 
along with on-the-job experience via internships with interested 
employers.
    I am attaching to this testimony a one-page flyer that summarizes 
the Professional Science Master's. Much more information can be found 
easily at www.sciencemasters.com
    I want to add in closing that it was personally encouraging to me 
that the Congress provided the first authorization of federal funding 
in support of Professional Science Master's programs, via the National 
Science Foundation, as part of the America COMPETES Act passed a few 
months ago and signed into law. It will now be interesting to see if 
these authorized funds are appropriated, and if so whether the National 
Science Foundation will move energetically to build this promising 
graduate pathway toward strengthening the U.S. science workforce.
    Thank you for your kind attention. I stand ready to answer any 
questions you may have to the best of my ability.




                  Biography for Michael S. Teitelbaum
    Michael S. Teitelbaum is Vice President of the Alfred P. Sloan 
Foundation in New York, where he is responsible for a wide range of 
program areas including the Sloan Research Fellowships, Science and 
Engineering Workforce, Professional Science Masters, Federal 
Statistics, and the Sloan Public Service Awards.
    During academic year 2006-2007 he served as the Edward P. Bass 
Distinguished Visiting Scholar at Yale. His research interests include 
the causes and implications (economic, social, geopolitical) of very 
low fertility rates; the complex processes and implications of 
international migration; and patterns and trends in science and 
engineering labor markets in the U.S. and elsewhere. He has written 
extensively on these topics, as well as on the historical demography of 
Europe and on the intellectual history of debates about demographic 
trends. He is the author or editor of 10 books and a large number of 
articles on these subjects, and is presently at work on a new book 
focused on the rapidly spreading phenomena of very low fertility and 
rising international migration around the world.
    Previously he was a faculty member at Princeton and Oxford 
Universities, and for two years was the Staff Director of the Select 
Committee on Population, U.S. House of Representatives. For much of the 
1990s he served as Vice Chair and Acting Chair of the U.S. Commission 
on International Migration. He currently serves on the boards of the 
Center for Migration Studies in New York, the Population Resource 
Center in Washington, Americans for Generational Equity in Washington, 
and the Population-Environment Research Network; and as a Member of the 
Global Commission on Aging.
    He was educated at Reed College and at Oxford University, where he 
was a Rhodes Scholar.

    Chairman Wu. Thank you very much, Dr. Teitelbaum. And Dr. 
McMillion, if you stay close to the five minutes of oral 
testimony, although we very much enjoyed Dr. Teitelbaum's 10-
minute testimony, we will have time for your testimony at which 
point we will have to take a break to go vote on the Floor. 
Please proceed.

  STATEMENT OF DR. CHARLES W. MCMILLION, PRESIDENT AND CHIEF 
              ECONOMIST, MBG INFORMATION SERVICES

    Dr. McMillion. Thank you for inviting me here today. I need 
to tell you I am from Texas, and so I speak very slowly. So 
five minutes goes quickly for me, but I will do my best.
    You have heard about challenges from the ample supply of 
STEM workers, and you will hear more on the supply issues. I 
will focus on three key challenges likely to weaken demand for 
STEM workers.
    This is the first of my three points. The rich U.S. 
marketplace for goods and services that sustains the STEM 
workforce has been maintained for a generation by soaring 
levels of debt. Since 1981, the ratio of federal and household 
debt to GDP has rocketed, breaking the World War II record in 
2002, and is now in uncharted territory. Over the last seven 
years, federal and household debt combined, increased by over 
$10 trillion by GDP grew just over $4 trillion. Without this 
debt, there would be far fewer STEM jobs. No one knows how much 
longer this unprecedented borrowing can last, but it is a major 
vulnerability for STEM workers and indeed for the U.S. economy.
    Second, massive U.S. losses in global trade have shifted 
our economy to activities that are non-globally traded, 
unraveling the technology supply chains that are essential to 
our STEM workforce and to our economy. For a generation, the 
United States has produced and earned far less than it spends 
borrowing and importing to make up for the shortfall, piling up 
record future obligations. The United States has accumulated 
$4.3 trillion in current account trade deficits just in the 
last seven years. Some economic theorists claim that importing 
what others can produce more cheaply allows a country to 
automatically concentrate on what it makes best, and the sales 
of this will pay for imports raising living standards for all. 
It is a nice story. The massive U.S. trade deficits over almost 
30 years now including technology show that the world has 
become a far more complex place.
    All manufacturing industries lost jobs since 2001. Most 
suffered trade deficits producing less than we ourselves needed 
for the U.S. economy. This process is unraveling or hollowing 
out the once tightly integrated and dynamic U.S. production and 
innovation system. Indeed, the United States lost its 
traditional global surplus and advanced technology products in 
2002, and that deficit is worsening by another 45 percent this 
year. Since 2003, the U.S.'s global earnings on intellectual 
property, royalties, and fees were not enough even to cover 
global payments for imported advanced tech products, much less 
for any of the non-ATP products from autos to oil.
    In the past seven years, of the 6.1 million total jobs 
created in the United States, all are accounted for in less 
productive, but globally protected, public and private 
education, health care, food services, and bars--some lawyers, 
too. During this time, more productive manufacturing jobs lost 
3.2 million jobs. Professional and technical firms did add some 
jobs, but most of these appear to be related to the debt 
financed and globally protected boon in construction, 
education, health, and national security.
    You heard testimony in June claiming as a success story 
that the United States no longer makes television sets because 
the United States must constantly innovate and move on. This 
now generation-old emphasis only on the nimble portion of the 
production and innovation system has worked very well for some 
individuals and for some global firms, but overall, it has 
failed STEM workers and the U.S. economy.
    Finally, thirdly, China and other competitors are 
modernizing and integrating their production and innovation 
systems posing urgent, new threats to the STEM workforce and to 
the continued U.S. prosperity. China's former processing trade 
has rapidly transformed, integrating its modernizing industries 
into dynamic, efficient clusters. China's global trade surplus 
in manufacturing was only $31 billion in 2001, but it is near 
$400 billion this year. For example, in the massive and very 
important parts-dominated machinery and computer industry 
grouping, HS-84, China has rocketed from a $7 billion global 
deficit in 2001 to a surplus that will blow past $100 billion 
just this year. China's global current account surplus is over 
13 percent of its GDP, and it this GDP of course is growing at 
over 11 percent a year.
    The world's leading technology firms now need to be in 
China, and they must have good relations with China's tech-
savvy and tech-hungry authorities. This need is not only 
because of very low production costs in China, but now also to 
be near their customers, the world's top producers of goods and 
services and the world's most rapidly growing domestic markets. 
This gives China's authorities enormous new power to require 
key tech transfers, R&D facilities, massive training, and a lot 
more. The OECD reports that China already spends more in 
purchasing power on R&D in Japan, and if current trends 
continue for just five more years, more will be spent on R&D in 
China than in the United States.
    A U.N. survey finds China the overwhelming choice for new 
R&D facilities. Difficult economic times present fire-sale 
opportunities to those with money to spend, and China now has 
unprecedented amounts of money in its fast-growing, now $1.5 
trillion official reserves and in its cash-rich firms fresh 
from wildly successful initial public offerings. This 
competition for the favor of China's authorities is ever more 
fierce, further weakening the demand for STEM workers in the 
United States. The STEM workforce and the U.S. economy face big 
challenges right now, not at some comfortably far-off point in 
the future. The United States cannot continue to rely on 
borrowing growth, channeling that growth to non-globally 
competing industries, and ignoring the rapid competitive 
emergence of China and others.
    I hope that Congress will urgently organize itself to 
develop this strong, comprehensive development strategy that 
the scale of this new challenge requires. Thank you very much, 
and I look forward to discussion.
    [The prepared statement of Dr. McMillion follows:]
               Prepared Statement of Charles W. McMillion
    Thank you Chairman Wu and the other Members of this committee for 
your work in this vitally important area and for inviting me to appear 
before you today.
    I believe the topic of these hearings is among the most important 
facing our country. The reason is simple: the U.S. can compete against 
vastly cheaper producers in China and elsewhere but only to the extent 
that producers of goods and services here in the U.S. make vastly 
superior products using vastly superior process technologies.
    Misleading ``competitiveness'' indexes now invented for global 
firms notwithstanding, the U.S. economy has not been competitive for a 
generation. Rather, our economy has worked-off the vastly superior 
wealth, infrastructure and production systems that it enjoyed at the 
end of World War II when much of the rest of the world lay in rubble.
    You heard from excellent witnesses in previous hearings and you 
have an outstanding panel of other witnesses today. So I will emphasize 
just three key, but often neglected points:

        1.  The U.S. economy and the scientific and engineering 
        workforce has been sustained by an unprecedented and 
        unsustainable level of debt for a generation;

        2.  Massive and chronic U.S. losses in global trade, a key 
        cause of the debt explosion, have now produced enormous and 
        unsustainable foreign debts and is rapidly undermining the vast 
        technology superiority that is essential to our STEM workforce 
        and to our economy;

        3.  China and other competitors are quickly creating remarkable 
        dynamism, modernizing and integrating their innovation and 
        production systems, posing very severe and urgent threats to 
        the scientific and engineering workforce and to the U.S. 
        economy.

    There is a convention in economics, often useful for theoretical 
work, that assumes full employment. Unfortunately this purely 
theoretical convention has come to be adopted as reality by many 
analysts in the U.S.--although rarely anywhere else. This often 
unconscious assumption leads many analysts and policy-makers to 
complacency, focusing exclusively on shifts within a fully employed 
workforce rather than on job losses and the wage and other effects of 
significant unemployment.

Sustaining the U.S. workforce and the economy

    Congress recently was forced to raise the $9 trillion federal debt 
ceiling. I hope all of you recall that the federal debt first reached 
$1 trillion only in 1981--after 200 years of world wars, a civil war, 
many other wars, depressions, recessions, wars on poverty, runaway 
inflation, rocketing oil prices, ambitious space missions and so much 
more.
    It was an enormous economic and political issue at the time and in 
many ways a turning point in public policies.
    The federal deficit now stands at $9.1 trillion, up $3.3 trillion 
over just the last seven years.
    Household debt is up even more, from $1.5 trillion in 1981 to $14 
trillion today--creasing $6.8 trillion in just the last seven years. 
That is, federal and household debt increased by $10.1 trillion in just 
seven years. For comparison, nominal GDP grew by $4.1 trillion--just 41 
percent as much as the growth of debt.
    As a share of GDP, federal and household debt fell from the end of 
World War II until the 1970s. Since 1981 the debt-to-GDP ratio has 
soared, breaking the WWII record of 138 percent of GDP in 2002 and is 
now in uncharted territory, reaching 165 percent of GDP at the end of 
FY 2007.
    Over the past seven years the U.S. created just 6.1 million total 
jobs with private sector jobs accounting for only 4.5 million of these 
with local public schools adding most of the public sector job growth. 
Even ignoring the multiplier effects of credit and job growth, this 
works out to over $1.6 million in tax cuts, government contracts, 
credit card and other debt stimulus for each new job; over $2.2 million 
for each new private sector job over the past seven years.
    Even if debt had grown only at the rate of nominal GDP (and 
ignoring the depressing effect this would clearly have on GDP) over the 
last seven years, this still works out to over $1 million per new 
private sector job. (A table of historical debt and GDP data is below.)




    Financial innovation and the ability to accumulate debt has been 
the strength of the U.S. economy. This distorts the economy in ways 
discussed below. Many find it unsustainable.

Global Commerce

    Economic theorists often claim that importing what others can 
produce more cheaply automatically allows a country to concentrate on 
what it makes best, the sales of which will pay for imports, raising 
living standards for all. But chronic and massive U.S. deficits--now 
including for technology--and borrowing show that the world is now more 
complex.




    For a generation the U.S. has produced and earned far less than it 
spends, importing to make up for the production shortfall and piling up 
worsening record levels of asset sales and debt obligations. Worsening 
record trade deficits for goods and services reduced U.S. GDP in every 
year from 1995 to 2006 although the overall deficit is improving 
somewhat in 2007. U.S. GDP growth has long been far slower than world 
growth--including in each of the past eight years--but the U.S. will 
nonetheless accumulated over -$4.3 trillion in Current Account trade 
deficits just between 2001 and the end of 2007.
    At the worst of the ``competitiveness'' crisis in 1987, the U.S. 
Current Account deficit briefly peaked at -3.4 percent of GDP. This 
deficit set a new record of -6.2 percent of GDP in 2006 and has now 
been worse than the mid-1980s' peak of -3.4 percent of GDP in each of 
the past eight years. On cue, the World Economic Forum of global 
banking and commercial firms just named the U.S. economy the world's 
MOST competitive; China and India rank 34th and 48th, respectively.
    Over the past seven years, 65 of the 98 U.S. goods-producing 
industries in the International Harmonized Code suffered trade 
deficits, producing less than was needed for the U.S. economy. In 
total, U.S. goods producing industries suffered a cumulative -$4.4 
trillion in net imports and production shortfalls over the past seven 
years.
    The worst industry shortfall, of course, is mineral fuels. But next 
comes vehicles and parts, electrical machinery and parts, non-
electrical machinery and parts, textile and apparel, furniture and 
almost all manufacturing industries that employ our science and 
engineering workforce. The only three large manufacturing industries 
with net exports and surplus production are aircraft and parts, medical 
and optical equipment and plastics--and the surplus in plastics is 
mostly for crude chemicals. Most of the goods-producing industries in 
which the U.S. has global net exports are agricultural and other 
commodities. (See table following.)




    Indeed, the U.S. lost its traditional global surplus in Advanced 
Technology Products in 2002 with deficits now in a majority of the more 
than 700 products. Even with the overall deficit in goods trade 
improving by six percent yr/yr through August 2007, the ATP deficit is 
worsening by -45 percent and could reach a new annual record loss of -
$56 billion. The ATP deficit is set to again exceed the net U.S. 
earnings on all Intellectual Property Royalties and Fees (including 
franchise fees) that appears headed for a total of about $42 billion in 
2007. This will be the worst deficit in the now fourth consecutive year 
that the U.S. has suffered a global trade deficit in combined tech 
goods and services.
    That is, for the past four years--and increasingly--U.S. global net 
earnings on Intellectual Property are not enough even to cover the net 
U.S. global payments for imported advanced technology products much 
less for any of the non-ATP products from autos to oil.

Labor market effects, current and future

    Jobs, businesses and tax revenues lost to net imports are not 
automatically replaced but rather rely on various forms of debt 
stimulus noted above. BLS' jobs data and re-employment surveys also 
make clear that in the U.S., contrary to conventional theory, 
unemployed labor does not typically find more productive, higher wage 
employment. For a generation, new job growth in the U.S. has been 
almost entirely in less productive but non-globally traded industries 
and occupations that are not easily out-sourced.
    In the past seven years of soaring debt, of the 6.1 million total 
jobs created, ALL were in non-traded, still-difficult-to-out-source 
public and private education and health care, and in food services and 
bars. During this time generally higher-wage, far more productive 
manufacturing firms were not adding but cutting -3.2 million jobs. 
Professional and technical firms did add 909,000 jobs during the 
period, many related to the non-globally competing boom in construction 
and national security.
    Adjusted for inflation, wages and salaries no longer rise three to 
four percent per year as they did in the previous generation but have 
been stagnant or falling for this generation. The BLS reported again 
last week that average--not just median--real wages rose slightly in 
the past year but after falling sharply in 2005 this brings real wages 
back only to levels in 2002. As other panelists will discuss, the 
science and engineering workforce also has faced stagnant or declining 
real wages for a generation as the supply and price of talent in the 
U.S. has outstripped demand.
    U.S. public policies and institutions have not kept up with 
fabulous technological advances, with the enormous and dynamic new 
capabilities of global firms or with the sophisticated and massive 
industrial policies of a few low cost countries, particularly China. 
Although China has long enjoyed a large surplus in trade with the U.S., 
China imported most of the component parts from other countries, mostly 
in Asia, with its economy focused on ``processing'' these parts into 
final goods. This ``process trade'' left China with a relatively small 
percentage of value-added in many modern products and only a small 
surplus in its global trade.
    This has changed dramatically. China's global surplus in 
manufacturing trade was only $31 billion in 2001 but soared to $277 
billion in 2006 and is on track to approach $400 billion for all of 
2007. In the large, parts dominated, non-electrical machinery and 
computer industry grouping (HS-84,) China has rocketed from a -$7 
billion global deficit in 2001 to a surplus of $77 billion in 2006 and 
the surplus is on track to far exceed $100 billion in 2007. China's 
global Current Account surplus reached $249 billion in 2006, 9.4 
percent of GDP, and will also approach $400 billion in 2007--near 14 
percent of a GDP that is growing by a price-adjusted 11.5 percent yr/
yr.
    Still, because of world-leading productivity growth, China reports 
that 1,440,000 (one-third) of this year's five million new university 
graduates were still without jobs in October. Cisco announced last week 
that they will expand their technology training centers in China that 
trained 90,000 since 2003 to train 100,000 more over the next three 
years. Comparable salaries for science and engineering jobs in China 
are reported between 10 percent and 30 percent of U.S. salaries.
    The world's leading technology firms now must be in China and must 
have good relations with China's authorities. This necessity is now not 
only because of competitive production costs but also in order to be 
near their customers--the world's top producers of goods and, 
increasingly, services.
    This gives China's authorities enormous power. For example, China 
requires global auto producers to have only a minority interest in any 
auto assembly plant in China, unless it is exclusively for export, and 
to provide an R&D facility. All major global auto firms are currently 
accelerating the amount, the scope and the quality of their R&D 
investments in China. Global firms in other industries are ``strongly 
encouraged'' to provide R&D before production permits are approved.
    A recent UN survey of global firms found China the overwhelming 
choice for new R&D facilities. Controlling for purchasing power, the 
OECD found that China already spends more on R&D than Japan, and if 
current trends continue there could be more spent on R&D in China than 
in the U.S. within the next FIVE years. If China's spending continues 
to accelerate as it is doing now and/or if U.S. spending slows, R&D 
spending in China could pass that in the U.S. even sooner.
    Of course, most R&D in China remains for now a variation on the 
theme of reverse engineering and most global innovations remain within 
foreign, global firms--although this is changing. China's vastly lower 
production costs allow ``fast followers'' and ``cherry pickers'' to 
reap much of the financial benefit from the innovations of others. With 
$1.5 trillion in foreign currency reserves, growing by $10 billion each 
week, China's authorities have vastly more power to access or acquire 
technologies than they had a decade ago when the House's bipartisan 
``Cox Commission'' last investigated these matters. Indeed, one of the 
more urgent commercial and military technology issues today is the 
security of safeguards for trade and technology secrets within the 
Chinese joint ventures of global technology firms.
    The current prospect of a U.S. economic slowdown or recession adds 
urgency to concerns for the science and engineering workforce. Along 
with the usual concerns for public and private R&D budget cutbacks, an 
economic squeeze often accelerates out-sourcing to lower-wage areas. 
Countries that depend on exports to the U.S. for growth would be 
affected, of course, but middle-range countries like Mexico would 
likely be most adversely affected by their own out-sourcing to lower-
cost countries like China.
    Also, difficult economic times present many fire sale opportunities 
to those with money to spend. China has unprecedented amounts of money 
to spend, both in it's official $1.5 trillion in foreign currencies, 
and in its often state-owned, cash-rich firms that recently issued 
wildly successful initial public equity offerings. The already intense 
and pervasive competition for the favor of China's very savvy 
authorities and their retainers is likely to get far more ferocious 
further weakening the scientific and engineering workforce in the U.S.
    The U.S. faces enormous economic challenges ahead. I hope that the 
Congress will urgently organize itself to begin to develop the type of 
strong, comprehensive strategy that the scale of this challenge 
requires.
    I would be very happy to discuss.
    
    
    
                   Biography for Charles W. McMillion
    President and Chief Economist of MBG Information Services, a 
consultancy based in Washington, D.C. providing timely business 
information, analysis and forecasting to a small, diverse national 
client base. Dr. McMillion combines more than 35 years of business and 
economic analysis, strategic planning and project management for 
industry, government and academia.
    Dr. McMillion is a former Associate Director and Associate 
Professor in the Johns Hopkins University Policy Institute where he 
researched and managed business and economic policy issues and projects 
in the U.S. and abroad. He has held Staff Director and Chief Economist 
positions in the U.S. House and Senate and is a founder and former 
Executive Director of the bipartisan United States Congressional 
Economic Leadership Institute, where he worked with the Speaker of the 
House to conduct the major opening activity of the 100th Congress. He 
is associated with 12 successful legislative initiatives on economic 
and business policy.
    He is the author or editor of four books and over 150 scholarly and 
popular articles and reports. A former Contributing Editor of The 
Harvard Business Review, McMillion wrote a regular column on key 
business and financial trends. He has also written a regular column on 
business for The Washington Business Times. A featured speaker in 
former President Clinton's December, 1992 Little Rock Economic Summit, 
McMillion often testifies on business issue before the U.S. Senate and 
House, and to state legislatures. He frequently lectures in the US, 
Europe and Asia including four tours sponsored by the United States 
Information Agency. A Returned Peace Corps Volunteer in Ethiopia, he is 
active in civic organizations.
    Born in Fort Worth Texas, Dr. McMillion received his BA degree in 
government at the University of Texas, an MA degree at Southern 
Methodist University, and MA and Ph.D. degrees in political economy at 
Rutgers University. His dissertation, written in Europe in the 1970s, 
is one of the first thorough examinations of the effects of global 
trade and finance on national and regional markets and industries.

SELECTED PUBLICATIONS:

``China's Soaring Financial, Industrial and Technological Power,'' U.S. 
        Small Business Administration, 9-2007.

``Effects of US-China Trade on the State of North Carolina,'' 
        Congressional US-China Commission, 9-2007.

With U.S. Senator Ernest Hollings, ``China is threatening America's 
        lead in technology,'' Financial Times, 1-15-2007

``The Economic State of the Union,'' Manufacturing & Technology News, 
        1-19-2006.

``China's High Technology Development; Effects on Silicon Valley,'' US-
        China Commission, 4-2005.

``Impact of US-China Trade and Investment on Pacific Northwest 
        Industries,'' US-China Commission, 10-2004.

``US-China Trade and Investment and Key Manufacturing Sectors in 
        Ohio,'' US-China Commission, 9-04.

``The U.S. Has Now Lost Its Advantage in Technology Trade,'' 
        Manufacturing & Technology News, 4-2-2004.

``North Carolina's Post-Bubble Future,'' The Charlotte Observer, 8-14-
        2002.

China's Very Rapid Economic, Industrial and Technological Emergence, 
        the US-China Commission, 2002.

With U.S. Senator Ernest Hollings, ``Raising the Technology Curtain,'' 
        Financial Times, 8-15-2000.

``Merger Madness,'' The International Economy, July/August 1999.

``Is Deflation Coming? An Exchange: McMillion vs Feldstein,'' The New 
        Republic, 11-2-1998.

``Will the U.S. Debate The New Global Economy Seriously?'' New 
        Technology Week, 2-26-1996.

``The Challenge of Assessing International Economic Performance,'' in 
        AAAS: Science and Technology Policy Yearbook. (Washington, DC: 
        American Association for the Advancement of Science, 1995). 
        ``Is Anybody Better Off?'' The Washington Post, Sunday Outlook 
        Section, 9-6-1992. ``Debt: There's a Better Way to Grow,'' The 
        New York Times, Sunday Business Section, 8-16-1992. ``Not 
        Higher Taxes, Faster Growth,'' The New York Times, Sunday 
        Business Section, 11-1-1987. Harvard Business Review: ``Wage 
        Gains Aren't What They Used To Be,'' (Nov/Dec, 1994); 
        ``Restarting the Trade and Competitiveness Debate,'' (Sept/Oct, 
        1994); ``The Myth of U.S. Manufacturing Superiority,'' (May/
        June, 1994); ``The G-7 Challenge,'' (Jan/Feb, 1994); ``Leaner 
        or Just Meaner?'' (Nov/Dec, 1993). Manufacturing in America: A 
        Quantitative View, (Washington: U.S. Competitiveness Policy 
        Council, 1993). The Economic Competitiveness of Maryland, 
        (Johns Hopkins Univ. IPS: Baltimore, 1991). Three Volumes. 
        Economic Competitiveness, Promoting America's Living Standard: 
        The Final Report and Omnibus Legislation of Senate Democrats, 
        (Washington, DC: GPO, U.S. Senate, 1986).

    Chairman Wu. Thank you very much, Dr. McMillion. At this 
point, we will recess this hearing. There are four votes, so it 
will be a decent period of time before we reconvene, and again, 
my apologies to the panel.
    [Recess]
    Chairman Wu. Here in the Science Committee we sometimes do 
demonstrations of--is it general relativity or special 
relativity--where time stretches out. My apologies to the 
witnesses. Dr. Salzman, please proceed.

STATEMENT OF DR. HAROLD SALZMAN, SENIOR RESEARCH ASSOCIATE, THE 
                        URBAN INSTITUTE

    Dr. Salzman. Thank you. My analysis draws on research 
conducted with my colleagues and based on fuel work at some 74 
sites, 38 firms in the United States, Europe, Asia, Latin 
America, and additional analysis of educational and workforce 
data, just to precede your findings.
    First, firms and universities are globalizing due to 
changes in competitive strategies and that innovation and 
knowledge are flowing across borders with few constraints. 
Second, globalization is not occurring because of a lack of 
U.S. STEM workforce supply or quality; and finally, technology 
policies, kind of referred to as techno-nationalist policies of 
the past, are not well-suited for meeting these kind of 
structural changes and challenges before us.
    So what do we observe about globalization of R&D? First, 
that firms are fundamentally restructuring their organization 
of innovation, engineering, and technology work by establishing 
centers of excellence around the globe, and these centers are, 
you know, all at the top end of leading edge innovation. It is 
initially driven by cost but it has since evolved into a much 
broader competitive strategy and focusing on cost misses what 
is behind this competitive strategy as it is evolving for R&D. 
They want to locate innovation centers in growing markets in 
emerging economies. They want to take advantage of labor there, 
both for cost and talent; and they are finding new types of 
innovation in those countries that is different from the types 
of innovation in United States, Europe, and other kinds of 
countries.
    So in IT, for example, companies have pioneered a lot of 
systematic software development in order to do offshore work. 
So there is necessity of crossing distance. As the technology 
becomes a mature technology, this process improvement becomes 
an important innovation in quality, security, reliability of 
software, and gives them an advantage very similar to what the 
Japanese brought to new levels of quality in auto design and 
manufacturing. I think we know what the rest of the IT story 
is, which is that the United States has not captured any large 
share, if any at all, of global growth in IT services. At the 
same time, the United States has maintained a stable workforce 
in IT, even without capturing a growing share of it, albeit 
with layoffs and adjustments.
    Other areas beyond IT are also developing in the emerging 
economies, often U.S. firms but often in their offshore sites; 
and we think the likely trajectory is the same as is happened 
in there. So what we find is that the institutional structure 
is vastly different than it was just a decade ago. Firms are 
globalized, U.S. human capital and universities and U.S. 
workforce is internationalized; and there is innovation 
advantages in offshore locations. These transformations mean 
that jobs that today look like they will stay in the United 
States because they require face-to-face interaction may not 
actually stay here in the near future. We visited firms that 
are doing KPO, knowledge process outsourcing, legal services, 
financial analysis, and other areas. It is just remarkable the 
things that they are looking at to see how they can decompose 
it, change it, routinize it so they can take most service work 
and conduct a large portion of it offshore.
    So based on these findings, I conclude that very few jobs 
are inherently not in competition with jobs offshore. Within a 
decade offshore science and engineering capabilities rival 
those in the United States in many areas, perhaps not the 
breadth of innovation and not the depth of technology in 
certain areas, but certainly there will be strong innovation 
centers in many areas offshore, both in the United States and 
non-U.S. firms.
    Last, we cannot assume the historical advantages that the 
United States will keep STEM jobs here indefinitely. Further, 
the strategy built on the assumption that the United States 
will have an exclusive hold on any particular type of work or 
occupation is in error. The approach in producing more 
scientists or engineers, at least those in the traditional 
disciplines, would seem to be misdirected.
    So the part that answers the question of are we producing 
enough at the right times and whether STEM jobs are attractive 
is perhaps the more important question. The data I think as 
Michael Teitelbaum reviewed suggests that we are providing more 
than adequate supply of college and post-graduate scientists 
and engineers. We estimate it is something on the order of two 
to three times the number of job openings. This doesn't mean 
that there is an excess supply, but just the pool is adequate 
to draw from if there were a shortage which we don't find much 
evidence of. Whatever the numbers about career openings and the 
prospects of the future, from engineers and managers we have 
interviewed have a widespread perception that career prospects 
in these fields are rather dim. And I think we need to point 
out fewer engineers or managers say they counsel their sons, 
daughters, nieces, and nephews to go into engineering. It had a 
great ride, but the ride is over in their view.
    You know, while I think that is disheartening to hear, what 
is even more disturbing in some of our interviews is 
exemplified by an engineering professor who told me that he 
would counsel an American student not to go to graduate school 
in engineering because of the poor career prospects. He said 
for a foreign student, it is a better career than their other 
options. For an American who had the ability to get into a 
graduate engineering program, he or she would have much better 
options elsewhere. Even within, it seems like, counseling is 
that there are not a lot of great opportunities. It is not true 
in all fields. There are some that are still very promising. So 
from what I can tell, there does not seem to be any real 
evidence of shortages or hiring difficulties. We have the 
person looking for a java programmer with 10 years' java 
experience. Well, java has been around 12 years. I am likely to 
find that. I am not sure that is a shortage. Or the company 
president who is quoted as saying there was a shortage that was 
so bad he had to start hiring people with just average skills. 
I think we would all like to hire at the top end of the 
distribution. That is probably not a realistic way to base 
policy.
    So to conclude the fundamental problem facing the United 
States is that the institutional structure of knowledge and 
innovation development have changed. Firms and universities are 
now globalized as our knowledge in human capital flows. The 
goal of sequestering innovation, knowledge, or skills within 
national borders can no longer be achieved, whether desirable 
or not. In the past, GM's progress returned a benefit to the 
United States. Today, it is less clear whether the United 
States benefit where at least the workforce benefits more from 
GM or Toyota. So the future home country advantage firms will 
diminish further when the vast bulk of profit and marker are 
outside of the United States Thee strategies built on thinking 
that we have borders that contain it or built on trying to 
increase the workforce supply and the idea of holding it here 
is just unworkable and suggest alternative policy strategies 
and models are needed to capture value in the new global 
system. Thank you.
    [The prepared statement of Dr. Salzman follows:]
                  Prepared Statement of Harold Salzman
    Mr. Chairman and Members of the Committee, thank you for inviting 
me to speak on the topic of globalization, the offshoring of research 
and development (R&D), and the science, technology, engineering, and 
mathematics (STEM) workforce. My testimony will address questions about 
the impact of offshoring and whether the United States has enough 
scientists and engineers (STEM workers), whether they are getting the 
education they need, and whether STEM careers are attractive. My 
analysis draws on research conducted with my colleagues Leonard Lynn at 
Case Western Reserve University and Lindsay Lowell at Georgetown 
University and is funded by the National Science Foundation and the 
Sloan Foundation.\1\
---------------------------------------------------------------------------
    \1\ The projects are supported through grants from the Alfred P. 
Sloan Foundation and the National Science Foundation, (Human and Social 
Dynamics Program, #SES-0527584; Social Dimensions of Engineering, 
Science and Technology #0431755). Additional support was provided by 
the Ewing Marion Kauffman Foundation to study technology 
entrepreneurship and globalization.

  The Urban Institute is a nonprofit, nonpartisan policy research and 
educational organization that examines the social, economic, and 
governance problems facing the Nation. The views expressed are those of 
the author and should not be attributed to the Urban Institute, its 
trustees, or its funders.
    We are examining how multinational firms are globalizing their 
engineering and innovation and changes in the science and engineering 
education pipeline. The offshoring of science and engineering (S&E), 
high-end technology, and innovation work is the outcome of firms' 
strategy and organization, global human capital development and flows, 
and the nature of innovation activity in emerging economies. Our 
findings about these three changes are the basis for analyzing which 
jobs in the United States are affected by the development of offshore 
work, skill and education requirements for STEM work in the United 
States, and STEM workforce supply, and for a set of policy 
recommendations.

Summary

    The following findings and policy implications are developed from 
my research on the globalization of innovation and engineering, and the 
U.S. STEM workforce education and supply.
Which STEM Jobs Face the Greatest Competition from Offshore Sites?

          Nearly all STEM jobs in the United States are already 
        or potentially in ``competition'' with offshore STEM jobs. The 
        historical advantages of advanced industrial nations may not 
        last because of the rising capabilities of offshore workforces, 
        changes in work process and communications, the potential 
        transformation of product and service development and delivery, 
        and innovation advantages in emerging economies.

          The impact of globalization on the U.S. workforce is 
        not just determined by the increasing amounts of work done 
        offshore. Although few jobs can only be done in the United 
        States or other advanced industrial countries, STEM job growth 
        in the United States can occur if the country can maintain a 
        sufficient share of overall global market growth. This, in 
        turn, depends on science and technology policy as well as other 
        ``competitiveness'' factors.

Supply and Demand for STEM Workers

          The available data indicate that the United States' 
        education system produces a supply of qualified STEM graduates 
        in much greater numbers than jobs available. If there are 
        shortages, it is most likely a demand-side problem of STEM 
        career opportunities that are less attractive than career 
        opportunities in other fields. However, standard labor market 
        indicators do not indicate any shortages.

          Although there have been steady increases in the 
        numbers of U.S. citizens and permanent residents pursuing a 
        STEM education at both the undergraduate and graduate levels, 
        the number of graduate students on temporary visas has also 
        grown. It is unknown whether this indicates students on 
        temporary visas are filling a demand for graduate students that 
        U.S. undergraduate colleges cannot meet (serving as a 
        complement to the domestic supply) or whether universities and 
        companies are substituting temporary visa students for 
        academically qualified U.S. students. Most likely, it is some 
        of both, and there is a need for further research to determine 
        the extent to which different immigration flows are complements 
        versus substitutes.

Implications for Science and Engineering Education

          The standard education measures indicate there are 
        enough students with the requisite skills to succeed in science 
        and engineering courses of study, and managers we have 
        interviewed rarely if ever note a lack of technical skills 
        among their STEM workers.

          The skills STEM job applicants and workers lack are 
        communication skills that enable employees to work across 
        boundaries, coordinate and integrate technical activities, and 
        navigate the multi-disciplinary nature of today's technical 
        work. While solid math, science, and technology education is 
        necessary to form the foundation for skills required by STEM 
        workers, globally competitive education must go far beyond 
        training technically competent graduates. A broad education 
        that incorporates a range of technical and social science and 
        humanities knowledge is important for developing a globally 
        competitive workforce. In this, the United States currently has 
        an advantage over the emerging economies.

A New Framework for Economic Growth
    It is necessary to develop a new framework for achieving economic 
growth and prosperity based on a ``collaborative advantage'' policy 
framework. In brief, it is an approach that builds strength through 
participating in the global supply of human capital and innovation in 
collaboration with other nations. In addition, rather than taking a 
zero-sum approach to innovation, economic growth, and prosperity, this 
approach is based on mutual-gain strategies in which the growth in 
global markets provides expanding economic and job opportunities in all 
countries.
    The United States is currently the best positioned country, I would 
argue, to lead this effort to establish a ``global commons'' of 
mutually beneficial global innovation and STEM workforces because of 
its history of openness, diversity, and free flow of knowledge, and 
because it is home to companies that are now leaders in developing 
globally distributed innovation systems (Lynn and Salzman, 2005). 
Learning how to maintain economic strength in this new world order, 
however, requires new policy approaches.

Background

    Before examining these findings and policy implications in more 
detail, it is useful to understand the background to current 
globalization patterns. The important structural changes in the 
globalization of innovation involve changes in human capital flows and 
firms' organizational form, structure, and functioning. Additionally, 
there has been an ``innovation shift'' in which pioneering technology 
development is occurring in emerging economies. This leads us to 
question the longstanding views about the inherent innovation 
advantages of advanced industrial nations and particular regions, such 
as Silicon Valley. Theories of ``geographical stickiness'' propose that 
some regions have a unique mix of firms, capital, culture, and talent 
that makes them spawning grounds for innovation. Although these regions 
are likely to remain strong, the emerging economies are developing 
regional innovation clusters and industries that will be on par with 
those in the advanced industrial nations.

Internationalization of the Workforce
    U.S. graduate schools and the workforce have become 
internationalized over at least the past 20 years. Students on 
temporary visas (recent immigrants) have generally made up between 20 
and 50 percent of graduates of science and engineering graduate 
programs (with a few exceptions, such as petroleum engineers, of whom 
over 75 percent are foreign student graduates\2\ ) since the late 1980s 
(see Figure 1 for 1995 and 2005). Some programs, such as IT-related 
programs, experienced sharp spikes in the number of foreign student 
graduates in the late 1990s, but for most programs, there has been a 
slow increase or constant rate of foreign student enrollments over the 
past 20 years. Over this period, these graduates have entered U.S.-
based firms and now make up a significant proportion of the science and 
engineering workforce, concentrated in particular occupations and 
industries (Table 1). A number of these scientists and engineers have 
now moved into senior technical and middle- and upper-level management 
positions. These workers, now in decision-making positions within 
firms, have the experience, familiarity, and linkages to facilitate the 
location of science and engineering work globally.
---------------------------------------------------------------------------
    \2\ Throughout this paper, ``foreign students'' refers to students 
on temporary visas (generally indicating students immigrating to attend 
school); ``U.S. students'' refers to both U.S. citizens and permanent 
residents. ``Immigrant workers'' is based on country of birth as 
identified in Census surveys.

De-integration of the Firm
    Historically, firms tended toward ever-greater integration of all 
parts of their production and services systems. This led to growth in 
organizational size and the scope of activities and functions. Firms 
also were firmly rooted in their ``home'' geographies, which aligned a 
firm's economic performance with that of the Nation in which it was 
based. Another structural shift that led to the current globalization 
of innovation began during the late 1980s. Out-sourcing began as large 
firms started buying rather than making commodity parts in 
manufacturing enterprises. Firms then expanded the scope of out-
sourcing to the external acquisition of innovation and high value-added 
functions. This change in innovation strategy occurred throughout many 
industries and, in a remarkable shift, Wall Street now considers firms 
to be weak if they rely on strong internal R&D rather than external 
acquisitions of companies, innovations, or technologies. This change in 
organizational form is the foundation for the globalization of science 
and engineering work we are now witnessing. An international workforce 
facilitates this globalization by providing the cross-cultural 
experience and knowledge (it is argued that the more integrated 
organizational form and less international workforces of European and 
Japanese firms slowed their globalization, especially of high-level 
activities).

Innovation Shift
    The third structural change is in the nature of innovation 
activity. There are at least three types of innovation shifts that 
provide advantages to emerging economies. First, in such areas as IT 
products and services, the initial offshoring of low-level activity 
(e.g., Y2K remediation) led to offshore companies implementing highly 
structured and systematized methods of developing software. As IT 
technologies mature, the innovation shifts from product development to 
process, which can lead to more reliable software.
    The second innovation change is in the types of innovation that 
come from the local context of the emerging economies. In previous 
stages of globalization, local innovation was confined to adapting 
existing products to local conditions. Now, the emergence of local 
innovation for local environments has not only global applications but 
can be a leading-edge innovation.
    Third, innovation is occurring in both high-end and low-end 
technology. In the past, typically only high-end innovation pushed the 
technology frontier. Now, low-end innovation may provide opportunities 
for new technology development and high profit. For example, the high-
end iPhone is predicted to capture something less than one percent of 
the global market (under 10 million units), whereas developing an 
innovative, cheap cell phone has potential sales in the hundreds of 
millions (China Telecom is already the largest cell phone company in 
the world with an estimated 300 million subscribers).
    Importantly, innovation in emerging economy sites may be conducted 
in local or foreign-owned firms. Conversely, innovation developed in a 
company's home country in advanced industrial nations may be 
transferred to locations elsewhere in the world. Leading innovation in 
a U.S.-based company does not necessarily mean the innovation activity 
or its benefits will accrue to the United States--it doesn't mean that 
it won't, but the inherent or taken-for-granted advantage to the United 
States of U.S. company innovation is increasingly uncertain.
    This analysis of the changes in the globalization of science and 
technology sets the background for considering the workforce 
implications.

Which STEM Jobs Face the Greatest Competition From Offshore Sites?

    Little can be predicted about the inherent qualities of STEM jobs 
that make them more or less competitive vis-a-vis workers in low-cost 
countries. A number of analysts argue that certain types of work are 
unlikely to be offshored, such as very high-end science and engineering 
work or jobs that require face-to-face interaction. An analysis of the 
relative growth of industries and employment opportunities for the U.S. 
workforce may be more important than an analysis of which jobs are 
inherently limited to the United States. That is, overall market growth 
is more likely to sustain U.S. workforce growth than is an attempt to 
maintain an exclusive share of certain jobs. The current U.S. IT 
workforce, for example, is certainly smaller than if all the global IT 
work were being done here. Yet, the U.S. IT workforce is not 
appreciably smaller now than it was in the past because of the global 
growth in demand for software services. At the same time, large numbers 
of IT workers have been laid off or forced to change jobs as a result 
of global shifts in the location of different types of IT work.

Job Offshoring
    As the supply of skilled workers develops across the globe, firms 
will not decide to locate work in the United States just because there 
is a large supply of skilled labor here. If the supply is already 
adequate elsewhere, as all indicators suggest, then increasing the 
supply here will not make the United States more attractive to firms. 
If, as we find, there is not a problem of supply of STEM workers in the 
United States, then what about the cost of STEM labor? Although cost is 
certainly important, particularly in the initial phases of offshoring, 
over time it becomes less important, particularly for high-end work. 
The wage-cost differential is declining, and when we include the 
coordination costs of travel and communications, we estimate the net 
cost savings of offshore STEM work is under 30 percent and shrinking. 
Further, for the highest levels of work, firms are not likely to 
jeopardize their innovative capabilities for marginal cost savings on a 
comparatively small portion of their workforce and wage bill. Now this 
is not always true, and it is not true for lower-level S&E work, but 
for high-level work, cost often becomes a secondary factor, as I will 
explain.
    In our research examining case studies at 67 sites of multinational 
and entrepreneurial firms, several technology and innovation patterns 
emerged (Lynn and Salzman, 2007). First, firms typically begin by 
locating lower-level work in their offshore site, but as these sites 
develop their capacity--hiring and training more educated and skilled 
workers, attracting emigrants to return--they engage in ``engineering 
creep,'' that is, the firms expand the range of work the offshore STEM 
workers do, sometimes as a complement to what is being done in the 
firm's home country sites, other times substituting for it. The 
progression up the ``innovation value chain'' is a new developing 
phenomenon, and we do not see any indication there are inherent limits 
to the level of activity that can occur in emerging countries. Human 
capital is becoming ever-more available, and financial capital is 
available as well. The large markets in China, India, Brazil, and 
elsewhere lead firms to make the investments even for expensive labs 
and development facilities in these countries.
    Some argue that the path for the United States is to move to the 
top of the value chain with highly skilled work, or creative work, and 
to abandon low-skilled work (e.g., NCEE, 2007). Others identify jobs 
that can't be offshored as personal services work (jobs that require 
face-to-face interaction) (Blinder, 2007). This proposition fails to 
account for the transformation that can occur in the structure of jobs 
requiring face-to-face interaction. For example, we visited a firm that 
does patent filings, financial analyst work, and other types of highly 
skilled professional services. Their approach is to restructure high-
end work so that only the bare minimum of face-to-face interaction is 
necessary. Thus, they claim many professional services can be reduced 
to 10 or 15 percent direct contact in the United States, while the vast 
bulk of the work is done offshore. Alternatively, the rise of medical 
vacations, for instance, transports the customer to the offshore site 
for personal service.
    These examples illustrate that firms are examining a range of STEM 
jobs that can be globalized. Recall that fewer than ten years ago, the 
consensus was that software could not be developed by teams separated 
over long distances. Microsoft was known for consolidating nearly all 
development in one physical location to facilitate knowledge transfer, 
typically transferring staff of acquired companies to their Redmond 
campus.\3\ Even more recently, a number of high-tech executives said 
they wanted to keep their work located in the United States because 
``it helps to have a concentration of researchers in the same place, 
where they can interact over the water cooler and at the baseball game, 
as well as on the computer screen'' (Wall Street Journal, 2006).
---------------------------------------------------------------------------
    \3\ In an analysis of Microsoft by Cusamano and Selby (1995, 12, 
105, 244), the company's strategy is to ``learn by doing'' rather than 
have formal training programs, supposedly a necessity in ``a fast 
moving industry.''
---------------------------------------------------------------------------
    From our research, it is difficult to draw any firm conclusions 
about the types of STEM jobs or activities that will necessarily stay 
in the United States. Multiple factors drive the development of 
offshore capabilities, and the global strategies of firms go far beyond 
cost factors. Although some types of work may be difficult to conduct 
over long distances or asynchronous work shifts, firms respond to these 
limitations by restructuring how the work is done and by moving the 
work to offshore sites.
    However, this does not indicate an imminent threat to higher-level 
S&E jobs: although globalization may limit the expansion of a firm's 
U.S. workforce, firms are unlikely to immediately abandon their U.S. 
sites due to their workforce's deep skill and experience. Firms' large 
investments in facilities and people are not easily replicated 
elsewhere. Moreover, the United States still has knowledge and 
capacities within its universities and organizations that are not 
available in the emerging economies. At the same time, there are 
impending shortages of workers offshore with the necessary skills and 
experience, so we should expect emerging economies will develop these 
capabilities at levels approaching those of the United States. Although 
there may not be precipitous declines in U.S.-based S&E work, growth is 
likely to be faster offshore, and some types of work may have faster 
offshore growth in the short-term, such as IT work.
    For these reasons, current policy proposals that focus on skill 
development or increasing the size of the STEM workforce may be 
counterproductive. Without evidence of the corresponding demand for 
these workers, merely increasing the supply will potentially reduce the 
quality of jobs and discourage the next generation of students from 
pursuing STEM careers.

Supply and Demand for STEM workers

    Common to many policy reports is a call for large increases in the 
STEM workforce, and K-12 improvement in math and science as the means 
of achieving this increase.\4\ The data do not reflect the claim that 
U.S. students show declining interest in science and engineering 
fields, either in college or in entering the workforce. There was a 
one-time dramatic ``Sputnik Spike'' of students entering STEM fields in 
the early 1960s, followed by a sharp decline and then a gradual 
increase beginning in the mid-1970s and continuing until today (see 
Figure 3). The actual numbers of STEM college graduates has increased 
over the past three decades and held steady in recent years (Figure 4). 
The ``continuation rate'' of S&E Bachelor's graduates going on to 
graduate school, following the early 1960s spike and then decline, has 
also remained at a steady rate for the past two decades (Figure 5). The 
major change since the 1960s, of course, has been the large increase in 
foreign-born students (on temporary visas) entering graduate school 
(Figure 6) and the workforce (Figure 2).
---------------------------------------------------------------------------
    \4\ The following sections draw on, and are excerpted from, an 
analysis by Lowell and Salzman (2007).
---------------------------------------------------------------------------
    From 1993 to 2002, U.S. colleges produced on average about 380,000 
STEM Bachelor's degree graduates, over 70,000 Master's degree 
graduates, and nearly 20,000 doctoral graduates. Is that enough? The 
answer is not straightforward. We need to know what the employment 
demand is, whether the overall supply of graduates interested in 
entering STEM employment is equal to or greater than the number of 
openings (demand), and whether individuals not entering STEM employment 
are pursuing other careers because they are not interested in a STEM 
career, or could not find a job, or are not qualified for the STEM jobs 
that are available.

Are There Enough S&E Graduates?
    To begin, it is important to know whether the production of 
domestic STEM college students is anywhere near the apparent demand for 
STEM workers. Looking at graduates and workforce growth, we can 
estimate an order of magnitude but not a precise calculation. Net 
workforce growth does not account for replacement needs due to 
retirement or to workers changing careers, and the supply of college 
graduates doesn't account for workers entering the workforce without a 
college degree or without a STEM degree (e.g., in IT occupations, up to 
40 percent of workers do not have a four-year college degree).
    The overall STEM workforce totals about 4.8 million, which is less 
than a third of the 15.7 million workers who hold at least one STEM 
degree. STEM employment is also a fairly consistent one-third of STEM 
graduates each year. From 1985 to 2000, the United States graduated 
about 435,000 S&E students annually with Bachelor's, Master's, and 
doctoral degrees--that total includes only U.S. citizens and permanent 
residents (about 72 percent of STEM workers hold a Bachelor's, 20 
percent a Master's, and seven percent a doctorate degree). Over the 
same period, the net change in STEM occupational employment ran about 
150,000 annually, such that the average ratio of all STEM graduates to 
net employment change was about three to one.\5\ Of course, net 
employment growth is not a direct measure of employment demand or total 
job openings, since net growth does not include replacement for 
retirements or occupational quits, nor do these aggregate numbers 
indicate the types of workers sought (education level, experience, 
etc.). Moreover, it does not address future changes in supply or 
demand. But it certainly is suggestive that plenty of STEM students 
have been graduating relative to employment growth in STEM 
occupations.\6\
---------------------------------------------------------------------------
    \5\ Calculations made by the authors based on data on graduates and 
S&E employment for every second year from 1985 through 2000; the ratio 
is based on three-year moving averages of net employment growth.
    \6\ This simple calculation appears not to square with a comparison 
of the annualized growth rate of STEM graduates and jobs from 1980 to 
2000. That calculation finds that the annual growth rate of STEM 
graduates at all degree levels is about a third of STEM employment 
growth (1.5 versus 4.2 percent annually). But the rate of growth 
argument is somewhat misleading, as the slower growth rate of STEM 
graduates is, as noted here, based on a far larger number than the 
smaller but more rapidly growing number of STEM jobs. At first blush, 
one might assume the number of graduates and jobs does not converge for 
about 20 years (see Science and Engineering Indicators, Appendix Table 
3-2, http://www.nsf.gov/statistics/seind06/pdf_v2.htm).
---------------------------------------------------------------------------
    Naturally, not all STEM graduates will enter a STEM job, whether 
because of a change in interest, because their qualifications are not 
adequate, or because they never intended to enter a STEM career in the 
first place. However, there is a surprisingly low rate of STEM 
retention for the 1993 to 2001 cohorts of STEM graduates. One to two 
years after graduation, 20 percent of STEM Bachelor's are in school but 
not in STEM studies, while another 45 percent are working but in non-
STEM employment (total attrition of 65 percent). One to two years after 
graduation, seven percent of STEM Master's graduates are enrolled in 
school but not in STEM studies, while another 31 percent are in non-
STEM jobs (total attrition of 38 percent) (NSF, 2006, Table 3).

The STEM Job Market: What Is the Nature of the Demand?
    The pathway from high school student to college graduate has a 
number of transition points that are the primary focus of current 
policy initiatives. The goal of these initiatives is to increase the 
flow into, and retention within, the STEM education pipeline. However, 
the data we have reviewed suggest that secondary and higher education 
systems are providing a more than adequate supply for industry's hiring 
needs. Of course, these are aggregate numbers, so there still could be 
shortages for particular occupations or industries. Also, targeted 
initiatives to increase the flow of under-represented demographic and 
income groups are warranted to increase workforce opportunity and 
workforce diversity. But overall, addressing the presumed labor-market 
problems through a broad-based focus on the education system seems a 
misplaced effort. Whether increasing the supply of STEM-educated 
workforce entrants would have any significant impact on workforce 
supply (given a graduate pool already 50 percent larger than annual 
openings) is a question that requires a better understanding of the 
labor market for these graduates. Moreover, increasing the education 
supply with such low yields seems a highly inefficient approach without 
a better understanding of the factors involved in the transition rates 
at all points along the pathway.\7\
---------------------------------------------------------------------------
    \7\ There is little comprehensive, systematic research on how 
college students choose a STEM career, either on the process or the 
factors that influence those choices. Standard labor-market economics 
theory focuses on the marginal impact of wage rate differentials. 
Research on career counseling is focused on matching interests and 
occupations, based on the assumption that interests are more or less 
fixed. The science and engineering communities have launched education 
and outreach programs to high school students to increase interest in 
those fields. And some observers focus on the overall appeal of an 
occupation based on its job quality and content of work as important 
factors influencing its attraction to potential entrants. There is some 
research that sheds light on the role of these different factors in 
labor supply.
---------------------------------------------------------------------------
    A few labor market studies, notably by Richard Freeman and 
colleagues (2004, 2006), have focused on the quality of STEM jobs. 
These studies conclude that the decline in the native STEM worker pool 
may reflect a weakening demand, a comparative decline in STEM wages, 
and labor-market signals to students about low relative wages in STEM 
occupations. Indeed, research finds that the real wages in STEM 
occupations declined over the past two decades and labor-market 
indicators suggest little shortage (Espenshade, 1999). Some researchers 
see these demand-side market forces causing highly qualified students 
to pursue other careers. A well-accepted model of cyclical patterns of 
student and worker supply is the cobweb model (Freeman, 1976). This 
research finds, in accordance with market mechanisms, that an increase 
in wages leads to an increase in job seekers but, in turn, a large 
supply of job seekers can depress wages. Declining wages will result in 
reduced student enrollments, although there is a lag in enrollment 
response. For example, research finds that a previous decline in 
mathematics enrollments through 1996 corresponded to this cycle (Davis, 
1997). For this reason, caution is needed in increasing the supply of 
STEM graduates, particularly at the graduate degree level, without 
considering the level of demand and impact on future supply.

Where's the Problem? Hiring Difficulties Versus Labor Market Shortages 
        and Perceptions About the Future of Science and Engineering
    It is generally asserted, without much evidence, that education 
deficits are responsible for the difficulty employers experience in 
hiring. It is important to distinguish between the problems an employer 
may have hiring the people he or she wants and an actual shortage of 
workers or potential workers. Although there may, in fact, be a labor 
market shortage, all the evidence cited in various policy reports is 
entirely individual employer accounts of problems in hiring. The 
industries most vocal about labor market shortages and the need to 
import workers may be voicing unrealistic expectations of desired work 
experience more than deficiencies in the skills or education of a new 
hire, or just dissatisfaction with the cost of labor.
    In previous research (Lynn and Salzman, 2002), we found that 
managers in engineering and technology firms do not claim a shortage of 
applicants, nor do they complain about applicants with poor math and 
science skills or education. They do often note difficulty in finding 
workers with desired experience, specific technical skills, or a 
sufficient number of ``brilliant'' workers in the pool.\8\ The 
complaint, quite often, appears to be one of unrealistic expectations, 
as unwittingly illustrated in a recent BusinessWeek (2007) article on 
labor shortages. In this article, a company president described the 
current labor shortage as follows: ``There are certain professions 
where skills are in such demand that even average or below-average 
people can get hired.'' It is difficult to consider an inability to 
only hire above-average workers a labor market shortage. Complaints 
also reflect firms' dissatisfaction about the need to train new 
entrants; often at issue is whether firms or education institutions 
should shoulder the costs of training new hires.
---------------------------------------------------------------------------
    \8\ Employers may complain of difficulties in hiring experienced 
workers with specific skills, such as JAVA programmers with 10 years 
experience, but these ``shortages'' are not the result of 
insufficiencies in the education system.
---------------------------------------------------------------------------
    Other than frustration at not having an applicant pool at the tail-
end of the skill distribution, the skills deficits most likely to be 
mentioned are the ``soft skills'' of communication and the ease of 
working across organizational, cultural, and disciplinary boundaries 
(Lynn and Salzman, 2002; Salzman, 2000). Science and engineering firms 
most often complain about schools failing to provide students with the 
nontechnical skills needed in today's firm.
    It is also worth noting that, more generally, employers do not 
complain about the math and science skills of employees hired for 
professional positions. In a study of engineering skills, managers did 
not identify technical qualifications as a concern. Employers' 
complaints about math skills typically involve examples of retail 
workers who can't count change or clerical applicants who lack basic 
literacy. And even for these levels, the need is for a broad array of 
academic, social, and communication skills (Murnane and Levy, 1996).
    If, as we argue, there is a sufficient potential workforce and any 
shortages are due to the inability of firms to induce more of those who 
are STEM qualified into STEM careers, then it is important to examine 
other factors that influence career decisions and hiring difficulties. 
In addition to wages, there is also the impact of perceived career 
opportunities and uncertainty. The current heated debate about the 
offshoring of engineering and other high-skill work should be expected 
to affect students' career choices. Although some analyses find 
relatively small numbers of jobs lost to offshoring, the perception 
about future opportunity is likely to affect a student's assessment of 
future opportunities as much as, or more than, tallies of current jobs 
available. These perceptions are not just the result of inflamed media 
commentators; even the business community appears to be undecided about 
the future course of its job location decisions. For example, in a bid 
to increase visa caps, a number of high-tech CEOs discussed the demand 
their companies had for U.S.-based science and engineering workers to a 
Wall Street Journal reporter in June, 2006:

         Mr. McNealy says Sun does 75 percent to 80 percent of its 
        research and development in the U.S. Craig Barrett, Chairman of 
        Intel Corp., says his company also employs most of its 
        researchers in the U.S. and wants to keep it that way. The 
        reasons? . . . ``If engineering is happening here in the U.S., 
        I think my children will have a richer work environment.'' 
        (Wall Street Journal, 2006)

    However, college graduates might have been influenced by an 
announcement Sun made to Wall Street analysts in May 2005:

         Sun Microsystems Inc. has chosen four of its facilities around 
        the world to take the place of its Silicon Valley office as the 
        research and development hub. . .. ``We are over-invested in 
        high-cost geographies like the U.S., and under-invested in low-
        cost geographies like India,'' . . . the company's Senior Vice 
        President of Global Engineering told reporters in Bangalore. 
        [He] said the company will not lay off programmers in the 
        U.S.--but won't hire many, either. . . . The company has 
        reduced its staff to about 30,000, from roughly 43,000 four 
        years ago. (Associated Press, 2005; emphasis added)

    One can imagine that companies who are offshoring would have hiring 
problems even with an adequate labor market supply in the United 
States. Similarly, IT executives calling for greatly increasing, or 
even completely removing, numerical caps on foreign worker visas (e.g., 
the H-1B) may be sending strong signals to students and current workers 
about diminished career opportunities. Human capital is a long-term 
investment and potential STEM students read all the tea leaves before 
investing. We have conducted interviews with current managers and 
engineers who believe that there is little future in entry-level 
engineering jobs in many industries, and IT in particular. Not only 
will it be difficult to fill mid-level and higher-level positions from 
an inexperienced workforce that never had an entry-level position, but 
several future generations of workers, currently in school, are 
developing their work interests and career aspirations based on their 
perceptions about the future state of labor markets. A range of public 
policies, such as immigration policy and corporate practices such as 
offshoring R&D, affect the current workforce and future generations as 
well.

Content of Engineering Work
    There is also some evidence that the content of engineering work, 
and the overall working conditions are less appealing today than in the 
past. From our current study of engineering, we often heard engineers 
and managers noting the lack of motivating science and engineering 
``problems'' or challenges, like those of the early days of IT, and the 
lack of national purpose that was evident during the heyday of the 
space program. Engineers and managers interviewed also pointed to 
changes in both the substance and process of engineering. Projects are 
larger, team efforts, and require more coordination and management 
(whether because of out-sourcing, systems integration, or increased 
scale of the technology, such as large enterprise resource planning 
systems). Developing and building many types of technology may be more 
routinized and less challenging or interesting than before. As one 
colleague expressed it, ``How many `real' engineers does it take to 
build a bridge?'' \9\ These are attributes of both the intrinsic 
interest of the field and the cultural milieu, or zeitgeist, of science 
and engineering. Although these factors are difficult to measure, they 
were noted by interviewees as often as diminished job prospects in 
explaining why they would not enter the field today.
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    \9\ Michael Horrigan, an economist at the Bureau of Labor 
Statistics, suggests that between the advances in knowledge for many 
engineering undertakings and technology shifts, say in using more 
engineering software, the role of engineering has likely changed and it 
may be that fewer jobs involve the engineering challenge of yesteryear 
(Personal communication, January 13, 2006). In our studies of 
engineering, we find that out-sourcing and offshoring lead to new 
engineering management layers and engineers comment that they now 
manage engineering projects rather than engage in ``real'' engineering. 
Others have commented that engineering is less central to 
``innovation'' or at least product development than design, marketing, 
and other areas.
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    Some STEM graduates simply leave the field because they lose 
interest in the application of their training or, more prosaically yet, 
they find that the labor market pays more for them to take other jobs 
(e.g., Freeman, 2006). It is thus important to examine the full 
spectrum of labor market signals that can influence student and worker 
career choices.
    Finally, it is important to understand the different STEM labor 
markets by industry, occupation, geography, and demographic. The labor 
market studies examine market conditions that may influence career 
choice in the aggregate. Less often do these studies examine choices by 
different demographic groups on entering specific STEM occupations or 
industries. For example, some STEM occupations appear to attract large 
numbers of traditional STEM students--U.S. native white males--but in 
others females outnumber males, and other occupations are 
disproportionately filled by immigrants. It is important also to 
understand specific industry dynamics. The IT industry labor market may 
be different from that of biotechnology or mechanical engineering 
(e.g., 40 percent of the IT workforce does not have a four-year degree; 
biotechnology has one of the largest concentrations of Ph.D.s in 
industry; engineers predominantly have only Bachelor's degrees). 
Although the labor market analyses examine changes in relative wages 
for STEM jobs and non-STEM jobs with similar education requirements 
(e.g., other professional jobs), they have not so far determined what 
affects the industry and occupation decisions of today's young people 
who could potentially enter STEM careers.

Implications for Science and Engineering Education

    This analysis of globalization has implications for both the 
specific educational needs of scientists and engineers and broader 
educational directions. First, I review the types of skills and 
education that businesses need as reported by managers in technology 
firms (Lynn and Salzman, 2002). Second, I discuss the broader 
educational needs and goals implied by our analysis of global shifts in 
innovation and technology development and by an economic strategy based 
on collaborative advantage. Finally, I raise questions about the policy 
recommendations that the U.S. workforce skill and education efforts can 
or should be focused on ``top of the value chain'' jobs and the 
implications for the U.S. position in the global economy.

Skill Requirements
    Over at least the past ten to fifteen years, organizational, 
technological, and business strategy changes have led to new skill 
requirements for engineers and other technical workers. The de-
integration of technology activity requires engineers to work across 
organizational boundaries with suppliers. Products that incorporate or 
have tightly integrated technology of different types, such as 
electronics and machines, or different materials, require engineers to 
work across disciplines, both within and outside of engineering. 
Business strategy that places more emphasis on market-driven technology 
development also requires engineers to understand the business drivers 
as well as the technical drivers of product or service development.
    These different boundary-spanning skills and abilities are 
increasingly important, especially in firms that are systems 
integrators or are at the higher value-added part of the development 
chain. Managers typically said that technical skills were fairly easy 
to find and not a distinguishing criterion between candidates. Setting 
good employees apart were their ability to communicate their ideas, to 
work with others on a team and with non-engineers, and other related 
social skills. These skills reflect the changes in the nature of 
engineering work, ranging from greater teamwork, working across 
disciplines, with customers, and interacting with customers and 
suppliers in developing and acquiring technology (Lynn and Salzman, 
2002).
    More recently, the global distribution of engineering has added 
another layer of technically adept but non-technical positions. 
Increasingly the ability to span cultures and nations is a key 
attribute. In this respect, we found global engineers and managers were 
often not born in the U.S. though educated here. Their experience 
across cultures and mixed national identities allowed them to move 
easily between and manage across global sites of the company.
    In summary, we consistently find employers in technology firms most 
valuing the boundary-spanning skills that require adroit communication 
and an ease at working outside of a narrow field of expertise or 
technical training. In nearly all cases managers found a plentiful 
supply of technically qualified applicants and hiring decisions were 
made on the basis of their non-technical skills. While many of these 
skills can be provided through broad-based, multi-disciplinary 
education, some of the skills appear to come from cross-national 
experiences. In most cases, although these people were educated in the 
United States they were not born here and had lived in more than one 
culture. Perhaps this can be taught, but it may also require educators 
to incorporate cross-national experiences as part of technical 
training.

Implications for Education Policy
    Solid math, science, and technology education is necessary to form 
the foundation of skills required by STEM workers. However, globally 
competitive education must go far beyond training technically competent 
graduates. A broad education that incorporates a range of technical and 
social science and humanities knowledge is important for developing a 
globally competitive workforce (e.g., see Hill, 2007). In this, the 
United States may have an advantage over the emerging economies. Trying 
to compete on the basis of sheer numbers of technically competent 
scientists and engineers is untenable and probably not the basis for 
achieving sustainable economic growth. Further, it is unlikely that a 
deficit of technical skills in the U.S. is leading to global diffusion 
of S&E work and innovation.
    Importantly, although small numbers of individuals are credited 
with creating breakthrough innovations, it may be a mistake to focus so 
keenly on education targeting the upper reaches of the technical 
workforce. Under-estimated in many analyses is the role of lower-level 
workers in achieving high productivity and economic growth. For 
example, although innovating a better computer network server is 
important, it is the legions of network administrators and technicians 
that affect how much of the potential productivity gains are realized 
from the technology. Similarly, throughout many types of work, the 
skills and aptitudes of lower level workers have individually small but 
cumulatively large impacts on the economy.
    A common but mistaken view of the future U.S. competitiveness 
focuses on maintaining a position at the ``top of the value chain.'' 
Some of these scenarios imply that in ten or so years most of the U.S. 
workforce will be employed in ``creative work'' with low-skilled jobs 
located in emerging economies or done by machine. This prescription 
errs in two respects. First, the workforce is unlikely to undergo a 
shift in its skill/job distribution of the magnitude implied by this 
prescription. The vast majority of the workforce currently are in jobs 
far from the level of ``creative'' and highly skilled work that is 
predicted to characterize the future U.S. economy. Wal-mart alone 
employs 1.2 million workers, with most earning less than $10 an hour. 
Restaurant and retail workers combined constitute the largest 
employment grouping in the U.S. labor force. Science and engineering 
jobs make up only five percent of all occupations, and even in highly 
technology-based industries, such as electronics or aerospace, the S&E 
workforce is well under 50 percent. Only in computer systems design and 
architectural and engineering services does it exceed half of their 
total workforces (57 percent and 58 percent, respectively; see Tables 
2-4).
    Secondly, this scenario assumes that the United States can dominate 
innovation and creative work globally. Every indication from our field 
work and review of current trends suggests it is highly unlikely that 
this work will be as geographically contained as it once was. As 
discussed above, firms have largely abandoned this old model and are 
globally distributing all types of work. It is not clear how the U.S. 
could achieve the dominance of global STEM work advocated in many 
policy reports when firms increasingly have ``top of the value chain'' 
work globally distributed.
    The global position of the U.S. may be changing but the data do not 
suggest a precipitous decline in science, math, and engineering 
performance or an inability to educate large numbers of qualified 
scientists or engineers is the cause. At the same time, the large 
numbers of low academic performers should be a cause for concern and 
should be the focus of competitiveness policy.

Conclusion and Policy Discussion

    Current policy is driven by the twin perceptions of a labor market 
shortage of scientists and engineers and of a pool of qualified 
students that is small in number and declining in quality. Math and 
science education are viewed as the primary policy levers to increase 
labor market supply, supplemented by increased immigration. But the 
data show little evidence to support those positions, and, in fact, 
indicate an ample supply of students whose preparation and performance 
has been increasing over the past decades. We are concerned that the 
consensus prescriptions are based on some misperceptions about 
efficient strategies for economic and social prosperity.
    Assessing the claims of labor market shortages is crucial. 
Purported labor market shortages for scientists and engineers are 
anecdotal and not supported by the available evidence. Little analysis 
has been conducted of firms' hiring difficulties and the supply of 
workers. A particular employer's or industry's experiences in hiring 
could be the result of any number of factors. The assumption that 
difficulties in hiring are due just to supply can have 
counterproductive consequences: an increase in supply that leads to 
high unemployment, lowered wages, and a decline in working conditions 
will have the long-term effect of weakening future supply by 
discouraging current students. Moreover, by bringing immigrants 
directly into the STEM workforce but without the attachments immigrants 
develop through longer residency and schooling in the United States, 
there is likely to be greater geographical workforce mobility. As the 
physical infrastructure of emerging nations improves and they retain 
more of their skilled STEM workers, the location of innovation and R&D 
is likely to follow.
    Investing in domestic human capital can provide longer-term 
benefits to the United States, and a collaborative approach with other 
countries will capture the benefits of their human capital development 
rather than trying to absorb it through short-term immigration to 
address short-term hiring needs (Lynn and Salzman, 2006, 2007). The 
characteristics of human capital development and employment are 
qualitatively different from that of prior periods, and we should not 
fall back on past approaches to policy. Instead, evidence-based policy 
is necessary for developing effective programs for the emerging global 
economy.

Policies to Strengthen U.S. Science and Engineering Capabilities
    Our analysis suggests several education and policy recommendations 
that will strengthen U.S. science, technology, and innovation.

1. Emphasize a broad education rather than a narrow technical 
education. Math and science skills are not what employers report being 
in short supply among their professional and technical workforce. An 
over-emphasis on math and science could lead to the exclusion of the 
skills employers report most needing among their STEM workers. At the 
same time, it is important to broaden the content and improve the 
pedagogy of science and math throughout the education system, at 
primary, secondary and college levels. There are a number of efforts 
under way to improve science, math, and engineering education; 
additional support and diffusion of new curricula would be beneficial.

2. Expand the opportunities to enter a STEM career to populations 
currently under-represented. A number of programs encourage under-
represented and minority high school and college students to enter STEM 
study and careers, such as those developed by the National Science 
Foundation. Improving the education of low-performing students and 
schools can expand the pool of qualified students motivated to enter a 
STEM career because of their intrinsic interest in these areas and 
because these fields offer attractive career opportunities. Increasing 
workforce diversity and equi