	Background

“Offshoring” generally refers to an organization’s replacement of goods and  services produced domestically with imports from foreign sources. U.S. Firms Continue to Offshore Increasingly Complex Semiconductor Manufacturing Activities and Software Services

The U.S. semiconductor industry has foreign operations in several  locations, notably in Taiwan and China. U.S. semiconductor firms first offshored labor- intensive assembly operations in the 1960s, then wafer fabrication, and  more recently, higher value-added activities, such as advanced fabrication  and design. The offshoring of software services largely began in the 1990s  in preparation for the year 2000 transition. Much like semiconductor  products, the types of software services that firms have offshored have  become progressively more complex as firms expanded their offshore  operations to customized applications requiring highly skilled workers. U.S. Firms Offshored Software Services in the Mid-1990s and Increasingly Offshore More Complex Activities

The software services industry was one of the first services industries to  offshore significant activities as U.S. firms recruited foreign software  programmers, particularly in India. Many firms in semiconductor manufacturing and software  services use offshoring in their business models to increase their global  competitiveness by lowering costs and gaining access to foreign markets. First, the essential advance in IT—the introduction of Internet  communications—made it possible to trade some services that were  previously not tradable. The Availability of Human Capital Was Key to the Expansion of Offshoring in Both Semiconductor Manufacturing and Software Services

The availability of high-quality workers overseas has been an essential  component of the increased use of offshoring for firms in the  semiconductor manufacturing and software services sectors. Foreign Government Policies Have Made Foreign Investment Attractive for Semiconductor Firms and Left the Software Services Industry Relatively Unregulated

Foreign government policies contributed to the development of dynamic  semiconductor and software services sectors with opportunities for U.S.  firms to offshore. India pursued policies that sought to support state-owned enterprises. The United States Continues to Be a Global Leader in the Development of Semiconductors and Software at the Most Advanced Levels

While offshore suppliers are playing a larger and more sophisticated role as  the industries globalize, the U.S. semiconductor and software industries  have remained technological leaders in the most advanced research and  development (R&D) and design work, and the United States remains one of  the largest producers globally of products in both industries. U.S. production and employment data show that the  industry has generally rebounded after declining during the 2001 recession. A third factor that fosters innovation is a country’s investment in research  and development. The United States is an integral part of this  dynamic world economy—in which it will be important for U.S. businesses  and policymakers to keep alert to technological changes, to anticipate  competitor countries’ strategies, and to preserve and enhance the elements  of the innovation environment that helped make the United States a model. Key contributors to this report are listed in appendix V.

Scope and Methodology

This report discusses (1) the development of offshoring in semiconductor  manufacturing and software services over time, (2) the factors enabling the  expansion of offshoring in these industries, and (3) the development of  these industries in the United States as they have become more global. Employment statistics from the Semiconductor Industry Association (SIA)  show a similar pattern for U.S.-based companies.
Why GAO Did This Study

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

What GAO Found

The U.S. semiconductor industry began offshoring labor-intensive manufacturing operations in the 1960s, followed in the 1970s and 1980s by increasingly complex operations, including wafer fabrication and some research and development (R&D) and design work. Semiconductor assembly and testing was the first to move to Asia, followed by fabrication and, more recently, by some design operations. Software services offshoring began in the 1990s after Internet communications made it possible to trade services such as software programming and software design. The year 2000 changeover hastened this offshoring trend related to software services because programmers knowledgeable in the appropriate programming languages were available, primarily in India. In the 2000s, firms further expanded their offshoring operations, based on the low-cost and high-quality work from the offshored services undertaken in the late 1990s. Although a lower labor cost was initially a key factor that attracted firms to offshore locations, other factors such as technological advances, available skilled workers, and foreign government policy, also played roles. Technological advances helped firms in the semiconductor industry improve their management of global supply chains and logistics. Regarding software services, technological advances opened the way to trade in programming and other software services. Foreign government policies in Taiwan and China created favorable investment conditions for U.S. semiconductor firms. India changed its emphasis from state-owned enterprises in the 1970s to an environment more amenable to private enterprise by the mid-1980s. Although its restrictions on foreign investment constrained the software services industry's overall development, India established software technology parks in 1990 to give domestic firms preferential access to the infrastructure essential for offshored operations. Although offshoring continues to grow in both the semiconductor manufacturing and software services industries, the United States remains one of the largest and most advanced producers of semiconductors and software services. U.S. production data show that both industries have largely rebounded from the 2001 recession. Employment data show a mixed picture, with semiconductor employment remaining flat and software employment mostly recovering. The United States has global trade surpluses in the semiconductors and software services sectors, although production is increasingly shifting to Asia. Both U.S. industries have become global, sourcing components from many locations overseas. U.S. firms have offshored increasingly complex products, essentially moving up the value chain. The ability of the United States to compete depends on research and development investment, innovative academic environments attracting top-quality students, and a competitive business environment. It will be important for U.S. businesses and policymakers to keep alert to technological changes and competitor countries' strategies while enhancing the elements of the innovation environment in the United States.