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Press Releases :: October 4, 2007

Exploration of Offshoring Issues Continue: Committee Looks at How Companies Choose Where to Locate Their R&D Facilities

(Washington, DC) The U.S. House Committee on Science and Technology’s Subcommittee on Technology and Innovation today held the third in a series of hearings this Congress on the complexities of offshoring – or the movement of U.S. technical jobs to overseas locations.

The hearing, entitled Globalization of R&D and Innovation, Pt. III: How do Companies Choose Where to Build R&D Facilities? explored the factors companies use to locate their research & development (R&D) and science, technology, and engineering intensive facilities.

“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,” said Subcommittee Chairman David Wu (D-OR). “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 healthcare.”

The Committee discussed 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; hence an exploration of 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.

The consensus opinion of the experts, including Committee witnesses in earlier hearings, is that keeping the U.S. on the cutting edge of innovation is even more important in the wake of offshoring. The challenge to U.S. technological leadership comes not only from low-cost countries, but also from other developed countries who are trying to move up the value chain as they find themselves losing lower-end work to low-cost countries.

Numerous reports indicate that low-cost countries are actively trying to move up the value chain by attracting more innovation activities. China’s trade surplus with the U.S. in advanced technologies has exploded in the past six years, from $1 B in 2000 to nearly $50 B in 2006. China has also become the second largest R&D performer, even ahead of Japan, according to the OECD. There are widespread reports that China and India are building significant R&D capacity by investing in research at universities, and are tilting their industrial policies towards higher end work.

"We need to confront the new and growing challenges we face when it comes to our strongest competitors. It's not just about lower labor costs. We need to make certain that we're investing in our universities, our transportation systems, a diverse housing market and health care to maintain our edge when it comes to higher end work,” said Wu.

While trends in R&D site selections are not well tracked, recent announcements show that many 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. A University of Texas study recently found that of the 57 major global telecom R&D announcements in the past year, more than 60% (35) were located in Asia, whereas, a meager 9% (5) were located in the U.S.

In his testimony before the Committee, Dr. Martin Kenney, a Professor at University of California Davis, said, “R&D globalization is not new…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. … 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.”

Studies show that many factors are weighed by firms when deciding to site an R&D facility including market access, government compulsion, 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. And some analysts 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. They argue that the U.S. should tilt its investments towards those R&D activities that are likely to be geographically sticky.

Dr. Robert D. Atkinson, President of the Information Technology and Innovation Foundation noted, “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. Eight of the top ten R&D-spending companies in the world have established R&D facilities in China.”

“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.,” added Chairman Wu.

Today’s hearing follows on a June 12, 2007 hearing that examined the current state of technical jobs in the U.S., as well as on the implications of innovation offshoring for U.S. workers and the economy; as well as a July 26, 2007 hearing that addressed the U.S. universities’ response to the globalization of R&D and innovation.

For more information on offshoring and the Committee’s ongoing oversight and other activities, please click here to visit the Committee’s website.

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