a

GAO

United States Government Accountability Office

Report to Congressional Committees

September 2006 OFFSHORING

U.S. Semiconductor 

and Software 

Industries Increasingly 

Produce in China and 

India

GAO-06-423
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

September 2006

OFFSHORING

U.S. Semiconductor and Software 

Industries Increasingly Produce in China 

and India 

Highlights of GAO-06-423, a report to 

congressional committees 

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 topquality 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. 

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 Recommends

GAO makes no recommendations 

in this report. 

GAO provided copies of our draft

report to the Departments of State 

and Commerce. The Department of

State did not provide comments; 

the Department of Commerce 

agreed with our findings. 

www.gao.gov/cgi-bin/getrpt?GAO-06-423.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Loren Yager at 

(202) 512-4128 or yagerl@gao.gov. 
Page i GAO-06-423 International Trade

Contents

Letter 1

Results in Brief 2

Background 4

U.S. Firms Continue to Offshore Increasingly Complex 

Semiconductor Manufacturing Activities and Software Services 8

Technological Advances, Availability of Talented Human Capital, 

and Foreign Government Policies Contributed to Increased 

Offshoring of Semiconductor Manufacturing and Software 

Services 13

The United States Continues to Be a Global Leader in the 

Development of Semiconductors and Software at the Most 

Advanced Levels 22

Concluding Observations 43

Agency Comments and Our Evaluation 45

Appendixes

Appendix I: Scope and Methodology 47

Appendix II: U.S. Multinational Companies’ Investment and Operations in 

the Semiconductor and Software Industries 49

Appendix III: Larger Imports of Information and Communication Goods 

Drive the U.S. Advanced Technology Product Deficit 58

Appendix IV: Comments from the Department of Commerce 61

Appendix V: GAO Contact and Staff Acknowledgments 62

Related GAO Products 63

Tables Table 1: Many Factors Contributed to a Favorable Environment for 

Offshoring in Semiconductors and Software Services 13

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

Computer Specialist Occupations 34

Table 3: Share of U.S. Foreign Affiliates’ Employment in Total U.S. 

MNC Employment Worldwide—ICT Sector Industries, 

1999–2003 54

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

Expenditures 55

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

Expenditures 56
Contents

Page ii GAO-06-423 International Trade

Table 6: Share of U.S. Companies’ Foreign Affiliates’ R&D 

Expenditures, by Industry for Selected Asia-Pacific 

Economies, 2003 57

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

2002–2004 7

Figure 2: Semiconductor Manufacturing Trends, 1960–2005 10

Figure 3: Value-added Trend for U.S. Semiconductor and Related 

Device Manufacturing, 1987–2004 25

Figure 4: Employment Trend for Semiconductors and Related 

Devices Industry, 1972–2005 26

Figure 5: Labor Productivity, Employment and Compensation 

Trends in Semiconductors and Electronic Components 

Manufacturing, 1988–2004 27

Figure 6: U.S. Imports and Exports of Semiconductors with All 

Countries, 1985–2005 28

Figure 7: Chinese Imports of Semiconductors by Country, 1995–

2005 30

Figure 8: U.S. Software Industry Revenues, 1990–2004 32

Figure 9: Projected Rate of Job Growth for Computer Specialist 

Occupations, 2004–2014 35

Figure 10: U.S. Unaffiliated Exports and Imports in Computer and 

Data Processing Services, 1986–2004 37

Figure 11: U.S. Exports of Software, 1998-2004 38

Figure 12: Gross Domestic Expenditures on Research and 

Development by Country, 1990–2004 41

Figure 13: U.S. Direct Investment Abroad in the Computers and 

Electronic Products Industry, Selected Asian Countries, 

1999–2004 51

Figure 14: Value-added in Semiconductors—U.S. Parents and 

MOFAs (including Asia-Pacific, excluding Japan and 

Australia) 52

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

China 59

Figure 16: U.S. ATP Electronics Trade with China 60
Contents

Page iii GAO-06-423 International Trade

Abbreviations

ACM Association of Computing Machinery

ATP Advanced Technology Products

BEA Bureau of Economic Analysis

BLS Bureau of Labor Statistics

CMM Capability Maturity Model

CMMI Capability Maturity Model-Integration 

EU-25 European Union

FDI foreign direct investment

ICT Information and Communications Technology

IDM Integrated Device Manufacturer

IT information technology

MOFA majority-owned foreign affiliates

MNC multinational company

NAICS North American Industry Classification System

PPP purchasing power parity

R&D research and development

SIA Semiconductor Industry Association

SIC Standard Industrial Classification

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately.
Page 1 GAO-06-423 International Trade

United States Government Accountability Office

Washington, D.C. 20548

A

September 7, 2006 Letr

Congressional Committees

Foreign competition over the last several decades has contributed to a 

decline in U.S. manufacturing employment, while U.S. firms have also 

moved some production activities to foreign locations in order to reduce 

costs or gain access to foreign markets. Concerns about U.S. 

manufacturing job losses have been allayed somewhat by the prospect of 

large numbers of high paying jobs developing in U.S. knowledge-based 

services industries, such as in the information technology (IT) sector. 

However, some types of knowledge-based services have become more 

easily tradable within the past 10 years due to the spread of the Internet, 

and concerns have now also arisen about what the offshoring of these 

types of activities may mean for the United States. 

In response to widespread congressional interest, we have undertaken a 

body of work related to offshoring under the Comptroller General’s 

authority to conduct evaluations on his own initiative. In this report, one in 

a series of reports on services offshoring,1

 we address offshoring trends in 

two important U.S. information technology industries—semiconductor 

manufacturing and software services. To analyze the U.S. semiconductor 

and U.S. software industries’ experiences with offshoring, we addressed 

the following questions:

• How has offshoring in semiconductor manufacturing and software 

services developed over time? 

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

• As these industries have become more global, what have been the trends 

in their U.S.–based activities? 

To answer these questions, we analyzed data and other research to develop 

a broad understanding of these industries. We conducted research on how 

1

GAO, International Trade: Current Government Data Provide Limited Insight into 

Offshoring of Services, GAO-04-932 (Washington, D.C.: Sept. 22, 2004); GAO, International 

Trade: U.S. and India Data on Offshoring Show Significant Differences, GAO-06-116

(Washington, D.C.: Oct. 27, 2005); and GAO, Offshoring of Services: An Overview of the 

Issues, GAO-06-5 (Washington, D.C.: Nov. 28, 2005). See also Related GAO Products at the 

end of this report.
Page 2 GAO-06-423 International Trade

these industries developed offshoring relationships in specific countries—

Taiwan and China for semiconductor manufacturing and India for software 

services. We examined the available literature on both industries; analyzed 

U.S. government data on foreign investment and trade in these industries; 

and interviewed representatives from firms and private sector associations, 

as well as industry analysts in the United States, Taiwan, China, and India. 

We conducted our analysis in accordance with generally accepted 

government auditing standards from October 2005 through August 2006. A 

detailed description of our methodology appears in appendix I. 

Results in Brief Over the past 40 years, the extent and complexity of semiconductor 

manufacturing and software services offshoring have grown as U.S. firms 

sought low-cost, high-quality workers in response to commercial 

competition. In the 1960s, U.S. firms offshored the labor-intensive stages of 

semiconductor manufacturing to make use of low-cost, unskilled foreign 

labor and to gain access to foreign markets. They maintained capitalintensive, highly-skilled wafer fabrication and design in the United States 

and offshored assembly operations for products generally destined for the 

U.S. market. In the 1980s, semiconductor firms moved some wafer 

fabrication activities to Asian contract manufacturers to reduce financial 

risk. Taiwan was a key offshore location for U.S. semiconductor 

manufacturers, initially for assembly and testing and later for fabrication. 

As China opens its market, Taiwan manufacturers are transferring some 

operations there, furthering China’s role as a rising player in the industry. 

More recently, U.S. firms have offshored more complex research and 

design activities; they have also sought to take advantage of Asian 

engineering talent and to target rapidly growing Asian markets. In the area 

of software services, firms began to offshore operations in the mid-1990s 

due to the need for skilled labor and cost reduction. Offshoring of software 

programming work, in particular, expanded in the late 1990s with the need 

for additional programmers to prepare for the year 2000 changeover. As 

telecommunications infrastructure expanded overseas and foreign 

countries liberalized their economies in the 1990s, firms turned to software 

programmers in other countries, such as India and Ireland. As firms 

experienced cost savings and observed high-quality work in these offshore 

locations, they expanded offshore operations to include more advanced 

operations, such as software design and systems integration. 

Although a lower labor cost was initially a key factor that attracted U.S. 

companies to many offshore locations, other factors such as technological 

advances, available human capital, and foreign government incentives were 
Page 3 GAO-06-423 International Trade

also important to the expansion of offshoring. For firms in the 

semiconductor industry, technological advances enabled improved 

management of their global supply chains. For example, sophisticated 

communication and product tracking technologies made possible efficient 

international product delivery systems. The development of 

telecommunications technology initially enabled software services firms to 

offshore basic software programming services. Such technology changes 

led firms in each industry to extend their basic business model to include 

global teams spread across multiple regions of the world and comprising 

foreign workers with high-quality skills. U.S. firms’ offshoring decisions 

also have been affected by a variety of foreign government policies. 

Semiconductor firms responded to the Taiwan government’s incentives and 

to China’s policies aimed at attracting semiconductor industry investments. 

Software services firms benefited from the lifting of certain Indian 

government restrictions and from incentives offered by India. 

Nevertheless, firms also encounter risk factors in offshoring; among these 

are geopolitical risks, the quality of infrastructure, and the absence of legal 

protection for intellectual property rights.

Despite the growing scope and sophistication of offshore activities, the 

United States continues to be one of the largest and most advanced 

producers of both semiconductors and software. U.S. companies are 

leaders in both industries, while foreign companies have established their 

own operations in the United States to access U.S. technology, skilled 

labor, and market. Although both semiconductor and software industries 

faced a downturn during the 2001 recession, U.S. production data show 

that they have generally rebounded and are growing. Employment data 

show a mixed story, with semiconductor employment remaining relatively 

flat and software employment rebounding. Trade data indicate that the 

United States has global surpluses in both semiconductors and software, 

although production is increasingly shifting to Asia. More broadly, the 

United States maintains several strengths that help foster and 

commercialize innovations in high technology sectors such as 

semiconductors and software. These include its higher education system, 

spending on research and development, and a competitive business 

environment. 

In this report, we make some observations comparing the offshoring 

experiences in semiconductor manufacturing and software services. We 

note the importance both of understanding the implications of rising 

foreign competition and technology change and of enhancing traditional 
Page 4 GAO-06-423 International Trade

U.S. strengths in areas supporting innovation and new commercial 

applications.

We received written comments on a draft of our report from the 

Department of Commerce, which generally agreed with our finding. (See 

app. IV.)

Background “Offshoring” generally refers to an organization’s replacement of goods and 

services produced domestically with imports from foreign sources.2

 For 

example, if a U.S.-based company decides to move its computer 

programming activities to an overseas supplier, this would be considered 

offshoring. The overseas supplier may be an affiliate of the company, in 

which case the company has also invested overseas. In contrast, the 

supplier may be unrelated to the domestic company, in which case the 

company has outsourced its computer programming activities, as well as 

offshored them. 

Semiconductors are devices that enable computers and other products 

such as telecommunication systems to store and process information. 

Semiconductor device fabrication is the process used to create “chips,” the 

integrated circuits that are present in everyday electrical and electronic 

products. It is a multiple-step sequence of photographic and chemical 

processing steps during which electronic circuits are gradually created on a 

wafer made of pure semiconducting material, most commonly silicon. 

Improvement in the performance of increasingly sophisticated electronics 

products depends on more powerful semiconductors that can store more 

information and process it faster. Demand for semiconductors is driven by 

the demand for computers and communications products that use them.

The semiconductor manufacturing process can be divided into three 

distinct stages: (1) design of the semiconductor integrated circuit, (2) 

fabrication of the semiconductor wafer, and (3) assembly and testing of the 

finished integrated circuit. The design and fabrication processes are the 

most capital-intensive, while the assembly and testing process tends to be 

more labor-intensive, although still relatively technologically sophisticated. 

For example, semiconductors are designed by computer engineers with the 

2

For a discussion of definitions of offshoring and outsourcing, see GAO, International 

Trade: Current Government Data Provide Limited Insight into Offshoring of Services, 

GAO-04-932 (Washington, D.C.: Sept. 22, 2004), p. 55.
Page 5 GAO-06-423 International Trade

assistance of advanced software. They are then fabricated using chemicals, 

gases, and materials combined in an intricate series of operations using 

complex manufacturing equipment to produce wafers containing a large 

number of chips. During assembly, the chips are assembled into the 

finished semiconductor components and tested for defects. The finished 

semiconductor consists of millions of transistors and other microscopic 

components. 

The technological complexity of semiconductors is indicated by the 

diameter of the wafer and the density of the etched lines (feature size) on 

the wafer. The size of the wafer is an important element because the 

number of chips per wafer increases dramatically as the wafer size 

increases. The current leading-edge manufacturers produce 12-inch (300 

millimeters) wafers.3

 Smaller feature size measured in microns allows for 

more components to be integrated on a single semiconductor, thus creating 

more powerful semiconductors. Each reduction in feature size—from 0.35 

micron to 0.25 micron, for example—is considered a move to greater 

technological sophistication. 

The software services industry also includes several types of services and 

levels of technological sophistication. Software services include writing 

individual software programs or combined “modules;” supporting these 

programs and modules once they are installed on computers; designing 

software networks, which might include various software programs, as 

well as systems of networks; integrating and maintaining these networks 

and systems as they are applied to clients’ tasks; and managing and 

operating clients’ overall computer systems. 

Software services are now broadly diffused throughout the U.S. economy. 

Firms across most industries now use some form of software services—

whether it is basic accounting software, inventory control software, or a 

much more complex software product applied to manufacturing 

operations. Automobile companies, for example, use advanced computer 

software in the design of new car models, on production lines that 

manufacture these cars, and in the cars themselves that now contain 

electronic components.

3

Moving from an 8-inch (or 200 millimeter) wafer to a 12-inch (or 300 millimeter) wafer 

increases the number of semiconductor chips by 2.25 times.
Page 6 GAO-06-423 International Trade

Software services generally range in complexity from routine software 

programming and testing to complex software programming, software 

project management, and higher-end software systems integration, 

architecture, and research. In general, software programs and modules can 

be produced in various locations; integrating these requires some focal 

points capable of working closely with the various locations.

Both semiconductor manufacturing and software services are key 

industries within the broader information and communications technology 

(ICT) sector; they have contributed significantly to overall U.S. growth and 

productivity. For example, semiconductor and related device 

manufacturing in the United States represents about 24 percent of the total 

value of the ICT sector’s computer and electronic products manufacturing. 

Software services comprise about 48 percent of the total production of the 

categories of services industries included in the broader ICT sector—

publishing industries (includes software), information and data processing 

services, and computer systems design and related services (averaged over 

1990 to 2004). 

Although the ICT sector represents a small share of the overall U.S. 

economy (about 4 percent), it has contributed significantly to U.S. 

economic expansion. According to the Department of Commerce’s Bureau 

of Economic Analysis (BEA), the ICT sector accounted for about 11 

percent of total economywide value-added growth in 2004. Examining 

value-added growth is a useful way to compare growth rates across 

industries because it measures only the increase in output due to that 

industry, excluding any inputs or materials from other industries. 

Therefore, value-added growth measures the changes in output due to 

increases in factors such as labor and capital and to improvements in the 

productivity of those factors. Figure 1 shows that, from 2002 to 2004, the 

ICT sector’s growth in real value added accelerated more than any other 

industry group. Although the ICT sector’s growth slowed in 2001 during the 

recession, annual real growth has recently accelerated from 2.0 percent in 

2002, to 6.7 percent in 2003, and to 12.9 percent in 2004. 
Page 7 GAO-06-423 International Trade

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

The ICT sector also contributes to productivity in the rest of the economy. 

For example, other manufacturing and services sectors, such as 

automobiles and banking, have become more productive as they have used 

the latest products and advances from the ICT sector. Economic research 

has generally found that the investments made in ICT sector products by 

other industries contributed to a rapid economywide increase in 

productivity during the 1990s.4

 In addition, the technological advances and 

competition within the sector have resulted in declining prices and rising 

performance in ICT products. This, in turn, has contributed to lower rates 

4

For example, see Dale Jorgenson “Information Technology and the U.S. Economy” 

American Economic Review, March 2001, 91(1), pp.1-32, and Kevin Stiroh “Information 

Technology and the U.S. Productivity Revival: What Do the Industry Data Say?” American 

Economic Review, December 2002, 92(5), pp.1,559-1,576.

0

3

6

9

12

15

ICT-producing industries

Private services-producing industries

Private goods-producing industries

2002 2003 2004

Percentage change

Year

Source: BEA.

1.3 1.5

2.0

1.2

3.2

6.7

3.9

4.9

12.9
Page 8 GAO-06-423 International Trade

of inflation throughout the economy as other sectors benefit from these 

improvements. 

We present information on multinational companies’ global operations in 

semiconductor and software services in appendix II.

U.S. Firms Continue to 

Offshore Increasingly 

Complex 

Semiconductor 

Manufacturing 

Activities and Software 

Services

The U.S. semiconductor industry has foreign operations in several 

locations, notably in Taiwan and China. The U.S. software services industry 

has turned to India for a significant share of its offshoring operations. The 

types of semiconductor manufacturing and software services that U.S. 

firms have offshored to Taiwan, China, and India have become more 

complex over time. U.S. semiconductor firms first offshored laborintensive assembly operations in the 1960s, then wafer fabrication, and 

more recently, higher value-added activities, such as advanced fabrication 

and design. The offshoring of software services largely began in the 1990s 

in preparation for the year 2000 transition. Much like semiconductor 

products, the types of software services that firms have offshored have 

become progressively more complex as firms expanded their offshore 

operations to customized applications requiring highly skilled workers.

Semiconductor 

Manufacturing Moved 

Offshore as Competition 

from Other Countries 

Developed; Firms Offshored 

More Complex Production 

Over Time 

Offshoring in semiconductor manufacturing began in the 1960s with laborintensive manufacturing activities, such as assembly. U.S. firms invested in 

overseas manufacturing facilities to perform the labor-intensive assembly 

of semiconductors for export to the United States. Firms domestically 

sourced the design and fabrication of higher-skilled, more capital-intensive 

semiconductor manufacturing activities and then shipped the 

semiconductors to Asia for assembly. The finished semiconductors were 

returned to the United States for final testing and shipment to the 

customer. According to some industry experts, offshoring of assembly 

work kept the U.S. semiconductor industry cost-competitive as new foreign 

rivals emerged in countries such as Japan. 

The overall U.S. business models for semiconductor manufacturing 

changed in the 1980s. Two types of company models developed for 

semiconductor production. Some companies, known as Integrated Device 

Manufacturers (IDMs), conduct their own research, produce their own 

designs, and operate their own fabrication plants to produce
Page 9 GAO-06-423 International Trade

semiconductor wafers.5 Other companies, known as fabless design firms, 

develop their own designs and contract with independent fabrication 

plants, known as foundries, to produce their wafers. Foundries emerged 

during the 1980s as firms in Asia, particularly Taiwan, began to specialize in 

wafer fabrication. With the emergence of overseas foundries, U.S. firms 

developed global supply chains for sourcing different parts of the 

semiconductor production process over multiple global locations. They 

continued to design in the United States and other developed countries, 

while contracting with foundries in Taiwan to perform capital-intensive 

wafer fabrication. They also continued domestic fabrication, but Asian 

countries increased their share of overall production—with Taiwan 

expanding as a major supplier of fabrication services and China emerging 

as a new source of fabrication services in the late 1990s. 

In recent years, some U.S. firms have offshored increasingly complex 

semiconductor fabrication and design activities—essentially going up the 

value chain (see fig. 2). As firms in other countries, notably Taiwan, became 

more adept at producing more complex semiconductors, U.S. firms 

increasingly turned to offshore manufacturers to produce these 

semiconductors. The most complex semiconductors now manufactured in 

fabrication plants (commonly called fabs) are 12-inch (300 millimeter) 

wafers with submicron feature size. U.S. firms were leaders in developing 

12-inch wafers. According to industry experts, firms have offshored design 

services to Taiwan due, in part, to maintain close contact with Asian 

customers to meet their specific requirements. Also, as semiconductor 

manufacturing becomes more complex, some experts have noted, it 

becomes all the more important to develop close relationships among 

design and manufacturing activities, so as to enable feedback discussions. 

5

However, IDMs may also use foundries in addition to their own fabrication plants to handle 

excess demand or certain production runs that are not economical for the IDM to produce.
Page 10 GAO-06-423 International Trade

Figure 2: Semiconductor Manufacturing Trends, 1960–2005

2

2

2

3

3

3

3

3

3

3

3

3

3

1

1

1

1

1

1

2

2

3

1

2

China

Hong

Kong

China

Taiwan

Taiwan

Taiwan

Multicountry 

design teams

Philippines

Philippines

United 

States

United 

States

United 

States

Canada

1960s to 1980s

Assembly abroad

Foundries abroad

1980s to 2000s

Design abroad

Companies initially moved assembly, 

testing, and packaging offshore.

Companies began contracting with 

offshore fabrication plants to produce 

wafers from designs.

Some design services were offshored, or a

part of global teams operating in many 

countries.

Complex global production chains

developed as designs may be fabricated 

in different locations, and wafers then 

sent to still other locations for assembly, 

testing, and packaging.

2000s to 2005

Design teams

Fabrication

Assembly, testing, and packaging

Malaysia

Malaysia

Malaysia

Sources: GAO (data); MapArt (map).
Page 11 GAO-06-423 International Trade

The gap in semiconductor manufacturing capabilities has narrowed 

between the United States and Taiwan and China. Currently, Taiwanese and 

Chinese foundries are capable of producing technologically sophisticated 

semiconductors. For example, Taiwanese foundries are now capable of 

producing integrated circuits as small as 0.09 microns, and some Taiwanese 

firms provide design services to support this level of semiconductor 

technology. In addition, according to industry experts, the newest 

semiconductor manufacturing facilities in China are capable of producing 

integrated circuits up to 0.13 microns in size, with one Chinese foundry 

known to be producing circuits at the 0.09 micron size. Thus, currently the 

most advanced manufacturing facilities in Taiwan and China manufacture 

integrated circuits that are only one generation or less behind state of the 

art.

U.S. Firms Offshored 

Software Services in the 

Mid-1990s and Increasingly 

Offshore More Complex 

Activities 

The software services industry was one of the first services industries to 

offshore significant activities as U.S. firms recruited foreign software 

programmers, particularly in India. Before the widespread use of the 

Internet, it was not economical to export software. U.S. firms either 

invested in overseas affiliates in India to directly provide software services 

for the firm or hired Indian programmers to work temporarily on-site at 

firms’ U.S. locations. Beginning in the 1990s, Internet communications 

combined with the availability of satellite connections and reduced 

telecommunication costs made it possible for foreign software 

programmers to remain abroad while working for U.S. clients. Many types 

of U.S. firms began re-engineering their business processes to concentrate 

on core competencies and outsource or offshore other activities, such as 

writing software programs. The offshored activities were those that could 

be reduced to step-by-step instructions, digitized, and performed at a 

distance. 

In the late 1990s, preparations for the year 2000 changeover contributed to 

U.S. firms’ further use of foreign software programmers who were 

knowledgeable in certain programming languages. U.S. firms turned not 

only to foreign software programmers who were temporarily employed in 

the United States but also to programmers overseas, particularly in India, 

who provided work directly to U.S. clients. In recent years, U.S. firms have 

offshored increasingly complex software services, going up the value chain 

as occurred in the semiconductor industry. Examples of less sophisticated 

software services are operations involving basic computer language coding 

or programming and managing computer databases. More complex 

offshored services include advanced software design and development 
Page 12 GAO-06-423 International Trade

activities and researching, designing, developing, and testing new software 

technology.

U.S. firms experienced high-quality work in offshore locations; for 

example, they discovered that firms in India have the capabilities to 

produce high-end software services, such as software design at a low cost. 

In addition, firms often combine highly skilled labor available in India with 

skilled labor in other countries to create global teams with specific skill 

sets. For example, one firm in India stated that a firm might begin a highend software development project in India and then transfer the work to a 

team in Ireland for further development before delivery to a U.S. client. 

Firms also use global teams to better serve local markets worldwide by 

providing customized programming services to local clients. 

Currently, the types of offshored software services activities now include 

advanced software engineering and research and development. For 

example, in recent years Indian and multinational firms, including U.S. 

affiliates, have established high-technology research and design facilities in 

India to perform such high-end software services as software engineering 

and software product development. According to software services 

industry experts in India, many of these facilities employ hundreds of 

software engineers to develop and test a wide range of new high-end 

software designs and products for export to global customers. Some firms 

in India stated that the quality of high-end software design and 

development activities in India, combined with firms' need to introduce 

new products and new technologies, have attracted increasing interest in 

offshoring software development to India. Nevertheless, the bulk of 

offshored software services in India can be characterized as lower-level 

work, mostly in the applications development segment of the industry. 

Applications development primarily requires programming skills and has 

limited face-to-face interaction. Moreover, applications development can 

easily be segmented and standardized, features that characterize offshoring 

software services.
Page 13 GAO-06-423 International Trade

Technological 

Advances, Availability 

of Talented Human 

Capital, and Foreign 

Government Policies 

Contributed to 

Increased Offshoring 

of Semiconductor 

Manufacturing and 

Software Services

The combination of technological advances, available human capital, and 

foreign government policies has created a favorable environment for 

offshoring. Many firms in semiconductor manufacturing and software 

services use offshoring in their business models to increase their global 

competitiveness by lowering costs and gaining access to foreign markets. 

Advances in telecommunications enabled semiconductor firms to improve 

their logistics and inventory controls; they also were particularly important 

to the offshoring of software services. Firms in both sectors initially sought 

low-cost labor, but they expanded the scope of their offshoring activities as 

they discovered and helped develop highly educated workforces in Taiwan, 

China, and India. Foreign government policies played different roles in the 

countries we visited. In Taiwan and China, the national governments 

pursued various industrial policies to promote semiconductor 

manufacturing and, in India, the loosening of regulations and the 

availability of government-supported software technology parks afforded 

the software industry opportunities to grow relatively unregulated. 

Although offshoring conveys benefits to firms that choose to locate 

operations overseas, it also encompasses business risks that challenge 

management skill. See table 1 for an overview of the factors that have 

contributed to increased offshoring.

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

Factors

Semiconductors

(Taiwan, China)

Software

(India)

Technology

Computer-related infrastructure Inventory control, radio frequency 

identification of products, logistics 

improvement

Telecommunications and broadband 

capacity improvements

Physical infrastructure Roads, ports, trucking improvements Fiber optics 

Human capital

Workers Assembly workers with less education; 

research and development and design 

professionals with higher education

Well-educated IT workers

English language ability English not required English essential

Cost of human capital Wage rates lower than U.S. wage rates; 

labor costs represent a small share of 

fabrication plants.

Wage rates lower than U.S. wage 

rates; demand is causing wages to 

increase. 

Government policies

 Education/training Vocational training emphasized Government promoted college 

education as a cultural value.
Page 14 GAO-06-423 International Trade

Source: GAO.

Technology Launched 

Important Changes in 

Semiconductors 

Manufacturing and Software 

Services

Improvements in telecommunication technology helped to expand the 

degree of offshoring in both semiconductor manufacturing and software 

services. With improved communications, U.S. semiconductor firms were 

able to create tighter linkages with overseas suppliers, and software 

services firms developed global teams that could transfer digitized 

information over the Internet. 

Technology Improvements 

Allowed Semiconductor Firms to 

Develop More Efficient Global 

Supply Chains 

Semiconductor manufacturing firms improved their management of supply 

chains through better telecommunications, logistics management, and 

modern transportation. Telecommunications has allowed better monitoring 

of the movement of products. For example, foundries in Taiwan use 

Internet-enabled software that allows real-time communication between 

engineering teams in different locations. Some U.S. companies use radiofrequency identification tags in Taiwan and China to track products 

shipped from these manufacturing locations to distribution centers in other 

countries. According to a representative of one U.S. firm, this technology 

has reduced the need for inventory sourcing redundancy, thus reducing 

inventory cost and the associated employment costs.

Logistics management is an important part of global business. Taiwan’s 

competitive logistics industry has offered advanced computerized systems 

that assist in the management of purchasing, storage, delivery, and 

distribution of products. According to a Taiwan government official, 

Taiwanese companies can provide production orders to their clients in 2 

days. According to an industry researcher, the automation of the 

 Investment incentives Various incentives available in science 

parks; government shares risk; China 

used a preferential value-added tax 

incentive to attract investment in the 

early 2000s.

Software technology parks include 

income tax credits, duty-free entry of 

capital goods, and access to highspeed telecommunications. 

Favorable tax/ land policies Offered by regional governments Less prevalent generally, but favorable 

leasing terms are available in science 

parks.

Private sector regulation Highly regulated, licensing required Software less regulated than some 

other private industry; private 

entrepreneurship is the prevailing 

model.

(Continued From Previous Page)

Factors

Semiconductors

(Taiwan, China)

Software

(India)
Page 15 GAO-06-423 International Trade

semiconductor assembly process also has improved efficiency in the 

overall semiconductor infrastructure, such as packaging facilities. 

Modern transportation options using more powerful computer systems, 

advanced software, and telecommunications make faster delivery possible. 

Countries are upgrading all elements of their transportation 

infrastructure—airports, seaports, modern roads, and trucking. Because a 

product may travel around the world more than once during the production 

process, efficient transportation systems are essential. For example, China 

has made numerous improvements to its transportation infrastructure to 

permit more efficient distribution. According to one Internet firm operating 

in China, the transportation infrastructure within China for delivering the 

physical products to customers—an essential component for online 

auction sites—did not exist before the year 2000. China reportedly invested 

$30 billion in 2004 alone to improve its network of roadways.

The Software Services Industry 

Changed Its Global Business 

Model

In the software services sector, telecommunications improvements have 

changed the types of software services traded, the way the work is done, 

and the telecommunications investments made. 

First, the essential advance in IT—the introduction of Internet 

communications—made it possible to trade some services that were 

previously not tradable. For example, software programs written in 

standardized programming languages could be digitized and transferred 

worldwide over the Internet.

Second, global teams have become common elements of firms’ business 

strategies. The ability to transmit data electronically made it possible to 

specify an application in one firm and develop it in another. Because of the 

availability of the Internet, teams can work 7 days a week, 24 hours per day 

to meet customer needs worldwide. These teams’ operations could be set 

up relatively quickly with office space, utilities, and communication tools, 

such as personal computers with broadband access. The ease of 

undertaking this type of offshoring has led to an escalating use of offshored 

IT services, including but not limited to software programming. According 

to one research firm, the value of IT offshoring and business process 

offshoring totaled $34 billion in 2005 and could double by 2007.

Finally, the services offshoring model has required investments in global 

telecommunications infrastructure, such as wired landline and satellite 

communication services. India has made the investments to facilitate the 

telecommunications industry. According to the government of India, in 
Page 16 GAO-06-423 International Trade

2005, 47 million landline connections and 65 million satellite connections 

existed in India. Moreover, in 2004, after the telecommunication sectors 

declined due to overcapacity, one major Indian telecommunications 

services firm, partly owned by the government of India, purchased a large, 

privately owned U.S. undersea fiber-optic network linking Asia, Europe, 

and North America after receiving national security approval from the U.S. 

government. This acquisition strengthened India’s control of low-cost 

telecommunications infrastructure. According to an Indian government 

official and several U.S. companies operating in India, the growth in 

telecommunications infrastructure has also enabled firms to move from 

India’s major cities to smaller, lower-cost surrounding cities. 

The Availability of Human 

Capital Was Key to the 

Expansion of Offshoring in 

Both Semiconductor 

Manufacturing and Software 

Services

The availability of high-quality workers overseas has been an essential 

component of the increased use of offshoring for firms in the 

semiconductor manufacturing and software services sectors. Through 

experience and training, the talent pool in several countries demonstrated 

their value to firms seeking skilled workers to perform tasks with various 

degrees of complexity.

Some Semiconductor Firms 

Turned to Low-Level Skilled 

Foreign Workers Initially but 

Gradually Offshored More 

Complex Work to Higher-Skilled 

Labor Forces Overseas

Access to human capital played an important role in the relocation of 

semiconductor manufacturing firms to Taiwan and China, especially as the 

need for skilled labor arose, and a quality workforce emerged in these 

countries. During the earlier phase of semiconductor offshoring in Taiwan, 

workers did not need advanced training. Taiwan emphasized vocational 

training during this period. Industry experts stated that, although lowercost labor was initially attractive for assembly, the labor costs component 

in semiconductor manufacturing is not a decisive factor for companies’ 

location decisions overseas.6

 New technology has computerized the entire 

production process, leading to a reduced need for labor and an increased 

need for skilled workers and managers. According to the representative of 

one research firm, the quality of the Chinese and Taiwanese workforce 

makes it easy to train and retain workers in semiconductor assembly and 

manufacturing. 

6

Semiconductor manufacturing plants cost about $3 billion, with labor costs contributing 

between 5 and 10 percent.
Page 17 GAO-06-423 International Trade

Taiwan, China, and India are each able to provide a quality workforce, with 

a plentiful supply of engineers including emigrants who have returned to 

work in their home countries. Highly trained professionals with experience 

in U.S. firms assisted the development in each of these three countries of 

their semiconductor and software industries. According to one research 

firm, more than 5,000 overseas students and professionals return to China 

each year, bringing with them Western knowledge and skills.7

 For example, 

several firms operating in China told us that Chinese returnees who have 

studied or worked abroad are an important part of their staffs. India, 

Taiwan, and China are each graduating IT and other engineers in large 

numbers. For example, China’s potential supply of engineers is large; 

according to one U.S. study, the number of Chinese engineering graduates 

with bachelor’s degrees in 2004 numbered 351,537, as compared with 

137,437 in the United States.8

 Moreover, engineers in Taiwan, China, and 

India typically earn less than their counterparts in the United States. For 

example, Taiwan’s domestic supply of engineers can be hired at 

approximately half the cost of engineers in the United States. 

Software Services Firms Find a 

Large Supply of Human Capital 

Overseas with Top Quality Skills

We reported in 2004 that access to human capital, particularly lower-wage 

skilled labor, an educated workforce, and quality local vendors facilitated 

software services offshoring. India is the leading example of this trend. For 

example, Indian wages represent a fraction of the cost of hiring U.S. 

counterparts, with the salaries for Indian IT engineers starting at $5,000. 

According to industry experts, the increasing demand for these workers is 

causing salary rates to increase somewhat. Yet lower wages does not tell 

the entire story because India also provides a skilled workforce. India’s 

leading software services association reports that 44 percent of India’s 

services professionals possess at least 3 years of work experience. 

Moreover, many Indian nationals who studied computer technology in the 

United States and gained experience with U.S. IT firms have begun to 

7

Chung Chen, Andrew and Woetzel, Jonathan R., McKinsey & Co., “Chips Fall Toward 

Design,” (South China Morning Post: Mar. 11, 2002). 

8

See “Framing the Engineering Outsourcing Debate: Placing the United States on a Level 

Playing Field with China and India” (Duke University: December 2005). This study indicates 

that China reported a total of 644,106 engineering graduates in 2004, but that data included 

those with education and training that differ from that attained in U.S. engineering degree 

programs. We report these data, which are based on a comparison of equivalent engineering 

programs. For information on U.S. higher education programs related to science and 

technology, also see GAO, Higher Education: Federal Science, Technology, Engineering, 

and Mathematics Programs and Related Trends, GAO-06-114 (Washington, D.C.: Oct. 12, 

2005).
Page 18 GAO-06-423 International Trade

return to India to pursue career opportunities in their native country. Some 

of these individuals have gone on to create or lead successful firms in India. 

India has a strong national emphasis on advanced technical education, and 

its scientific and educational institutions produce well-trained scientists 

and engineers. The highly competitive Indian Institutes of Technology 

trains the upper echelon of talented students and, according to one 

industry researcher, produces highly skilled engineers with capabilities 

that match or exceed U.S. talent. In addition, an industry researcher in 

India stated that nontechnical programs are beginning to offer computer 

science and software programming courses to prepare students to meet the 

market demand of the software services sector. According to India’s 

software services association, of the 215,000 engineering graduates in 2003 

to 2004, 141,000 specialized in IT (e.g., computer science, electronics, and 

telecommunications).9

 India’s use of the English language gives it a further 

advantage, making India a prime destination for services offshoring. 

Finally, the quality of the firms in India is another factor that is considered 

when firms decide to offshore services. The quality of local vendors, many 

with Capability Maturity Model (CMM) certifications, provides a sense of 

security to firms seeking to offshore software services to India.10 According 

to a business association in India, Indian companies work to attain these 

certifications to demonstrate the high quality of their work. For example, a 

business representative told us that more than 50 percent of the companies 

that have CMM Level 5 certifications are located in India. With the update 

of the CMM to the Capability Maturity Model-Integration (CMMI), the 

Software Engineering Institute reports 93 Indian and 74 U.S. entities (41 

percent and 32 percent, respectively, of the world total) with CMMI 

certifications as of March 2006.

9

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

10CMM was established in 1984 through Carnegie Mellon’s Software Engineering Institute. 

The CMM is a framework that describes the key elements of an effective software process. 

The model was updated to the CMMI in 2000. The CMMI provides companies with guidance 

for improving their processes and managing the development, acquisition, and maintenance 

of products and services. 
Page 19 GAO-06-423 International Trade

Foreign Government 

Policies Have Made Foreign 

Investment Attractive for 

Semiconductor Firms and 

Left the Software Services 

Industry Relatively 

Unregulated

Foreign government policies contributed to the development of dynamic 

semiconductor and software services sectors with opportunities for U.S. 

firms to offshore. The governments of Taiwan and China developed a broad 

range of policies to promote their respective indigenous semiconductor 

industries and to attract investment, technology and talent from abroad. 

India, in its transition from a socialist government to a market-based 

economy, has liberalized its software services market, thus permitting U.S. 

firms to access India’s low-cost high-quality workforce.

Government Policies in Taiwan 

and China Have Assisted Their 

Respective Semiconductor 

Industries

Taiwan has long pursued industrial policy to encourage the domestic 

development of science and technology. In 1972, it established a national 

research institute and within that organization an office to develop its 

semiconductor industry. Drawing upon the expertise of a U.S. advisory 

group, Taiwan successfully duplicated elements of the Silicon Valley 

technology cluster by establishing science-based industrial parks that 

brought together major universities, research labs, and a dynamic venture 

capital industry. Its universities feature programs sponsoring research 

specific to semiconductors, and the government targeted financial and tax 

incentives to the semiconductor industry. The government also emphasizes 

vocational training to develop quality resources. As a result, the 

government of Taiwan helped position its semiconductor industry as an 

effective contract supplier integral to the U.S. semiconductor supply chain. 

Its industrial strategy, which has been characterized as “close 

followership,”11 integrated Taiwan’s industry operations with those of U.S. 

companies. Although this strategy means that Taiwan’s industry may be a 

step behind the U.S. industry, firms in Taiwan capture high-technology 

industrial and research functions. As a result of its efforts, Taiwan is now a 

leading semiconductor producer with top-level manufacturing expertise.

Taiwan’s support of a strong semiconductor sector continues to evolve 

with a project that focuses on integrated circuits manufacturing 

infrastructure. The government is providing partial financial support to this 

project, which includes the expansion of university-based training, 

investments in new technologies, and a design park to focus on system-on11Howell, Thomas R., testimony to the Committee on Commerce, Subcommittee on 

Technology, Innovation and Competitiveness, Hearing on Manufacturing Competitiveness, 

June 8, 2005 (Washington, D.C.). “Close followership” refers to firms that closely align 

themselves with their customer, adopting technology soon after the customer.
Page 20 GAO-06-423 International Trade

a-chip design.12 With added pressure from the opening of China’s market 

and the competition from Chinese firms, Taiwan is revisiting its restrictions 

on the level of technology that firms may transfer to mainland China.13 In 

April 2006, Taiwan announced it was removing restriction of the export of 

low-end semiconductor packaging and testing technology to China. 

China’s current policies have helped its semiconductor sector to grow 

dramatically since 2000, but its wafer production represents a relatively 

small percentage of worldwide production. Nevertheless, China is 

considered a rising player in the field of advanced technology. Prior to 

2004, China’s differential value-added tax, since normalized,14 was a notable 

policy that led to an influx of semiconductor firms into China —notably 

from Taiwan—that sought to avoid the impact of the tax. Following 

Taiwan’s strategy, China is creating a modern infrastructure to support 

semiconductor operations. For example, the government provides tax 

incentives, preferential loans, and opportunities to locate in special 

economic zones and science parks. China announced, in 2006, the adoption 

of a 15-year national technology strategy to develop, among other things, a 

world-class information sector and to focus on developing independent 

innovation. The result of China’s policies is an expanding semiconductor 

sector that relies heavily on the expertise of Taiwan’s managers and other 

expatriates whom China is actively recruiting to return to the mainland.15

12System-on-a-chip design integrates computer components on a single chip. It may contain 

digital, analog, mixed-signal and radio frequency functions.

13Currently, wafer technology using at most .25 micron circuitry may be transferred to the 

mainland. In February 2006, Taiwan levied a fine of about $155,000 on a leading Taiwanese 

firm that aided in the establishment of a Chinese chipmaker without Taiwan’s approval in 

violation of its statute governing relationships between people in Taiwan and people on the 

mainland. 

14In July 2004, China and the United States resolved the World Trade Organization dispute 

over China’s differential value-added tax, which had disadvantaged U.S. and other foreign 

firms whose semiconductors were not designed or produced in China. According to experts, 

China has implemented this agreement.

15Taiwan’s supplier relationship with the U.S. microelectronics industry is under pressure 

from the new opportunities for U.S. (and other) firms in China. According to one U.S. legal 

analysis, Taiwan has placed legal restrictions on the level of technology which its own firms 

may transfer to mainland China.
Page 21 GAO-06-423 International Trade

India’s Software Industry Was 

Not Subject to Many of India’s 

Restrictive Policies

India’s policy for software services differed from the deliberate industrial 

policy undertaken by Taiwan and China. India’s government policy shifted 

from protection of domestic industries to a gradual liberalization of some 

regulations. Although India maintains significant controls on some 

industries, the software services sector was not affected by some of the 

most restrictive policies, given the small size of its enterprises. 

Entrepreneurs in the software services sector were able to build the 

industry based on the special attributes of India —its English-speaking 

population, its supply of IT professionals, and its favorable 

telecommunication infrastructure. 

Between the 1950s and 1980s, India generally protected domestic firms 

from foreign competition and undertook a policy of import substitution.

India pursued policies that sought to support state-owned enterprises. 

Where private firms were permitted to operate, a cumbersome licensing 

bureaucracy controlled their operations. Initially prevented from 

expanding into higher value-added segments of the industry in the 1980s, 

software services firms nevertheless found areas of specialization that the 

government did not restrict. In 1991, India experienced a shortage of 

foreign exchange, which required liberalization of its economy as a 

condition to gain support of the International Monetary Fund. This led to 

further deregulation, which enabled software services to expand. 

Moreover, in the 1990s, India introduced software technology parks, which 

are similar to export processing zones. Firms in these parks were given tax 

exemptions, access to high-speed satellite links, and reliable electric 

power. India’s technical universities trained large numbers of engineers and 

specialists in their highly selective IT programs. Later reforms of foreign 

ownership rules, intellectual property protections, and venture capital 

policy further opened the way for trade in services. 

Other Factors Constrain U.S. 

Firms’ Offshoring Decisions

Firms seeking to offshore also encounter risks, including unforeseen costs, 

geopolitical concerns, cultural differences, infrastructure adequacy, and 

foreign government requirements. The destination country’s legal system 

and contract enforcement affect firms’ decisions to offshore. Both the 

semiconductor and software services industries have specific concerns 

about countries’ intellectual property protection for their products and 

make location decisions accordingly. It should also be noted that offshoring 

places higher demands on firms’ internal management skills. Managers 

must be able to lead teams with cultural differences, establish metrics to 

assess contract performance, and manage teams located around the world, 

using telecommunications as a primary tool. Although firms have found 

some cost savings in labor, nevertheless, they have also found other 
Page 22 GAO-06-423 International Trade

management challenges that tend to moderate the overall cost savings. One 

recurrent concern of U.S. firms operating in China is the lack of middle 

managers with the combination of business training, business acumen, 

management skill, and creative thinking.

The United States 

Continues to Be a 

Global Leader in the 

Development of 

Semiconductors and 

Software at the Most 

Advanced Levels

While offshore suppliers are playing a larger and more sophisticated role as 

the industries globalize, the U.S. semiconductor and software industries 

have remained technological leaders in the most advanced research and 

development (R&D) and design work, and the United States remains one of 

the largest producers globally of products in both industries. Available 

indicators on production, employment, and trade show that both of these 

industries have generally rebounded since the 2001 recession and continue 

to grow. Traditionally, the U.S. economy has had several advantages that 

fostered strong semiconductor and software industries, including its highly 

competitive university system, talented labor pool, large domestic market 

for products, high levels of spending on R&D, and competitive business 

environment. 

The U.S. Semiconductor 

Industry, Rebounding from a 

Recent Recession, 

Continues to Be a Global 

Leader

Despite having offshored some semiconductor operations, the U.S. 

semiconductor industry remains a global leader in cutting-edge 

semiconductor chip design and fabrication. U.S. semiconductor production 

has begun to rise again after a sharp decline during the 2001 recession. 

However, U.S. semiconductor employment, which also fell during this 

period, has remained relatively flat since 2003. U.S. exports have also 

remained flat, but imports declined more sharply creating a U.S. trade 

surplus in semiconductors. The United States generally exports high-value 

fabricated chips and wafers to lower-cost locations for assembly and 

testing. It imports integrated circuits (semiconductor wafers that have 

been assembled and tested) for use in a variety of industries. However, 

global demand for finished semiconductors has increasingly shifted to Asia 

where final assembly of electronic consumer products takes place.

The United States Is a Global 

Leader in Semiconductor Design 

and Fabrication

Semiconductor fabrication and design capabilities are spread among 

traditional producers such as the United States, Japan, the European 

Union, and newer producers such as South Korea, Taiwan, and China. 

According to industry experts and data, however, the United States remains 

one of the largest producers of semiconductors and, in particular, 

maintains cutting-edge development of both design and fabrication of new 

semiconductors. Industry estimates of semiconductor capacity vary, but 
Page 23 GAO-06-423 International Trade

the United States and Japan remain the largest two producers of 

semiconductors. Although a significant share of new high-end fabrication 

facilities are being built outside the United States for mass production, the 

United States is a key location for the fabrication facilities used for 

development of new semiconductor chips. 

As a global industry, U.S. production includes both U.S. companies and 

affiliates of foreign companies operating in the United States. Foreign 

companies have established operations in the United States to take 

advantage of U.S. technology, skilled labor, and the large domestic market, 

according to industry experts. One estimate suggests that about one-fifth of 

U.S.-based fabrication capacity was owned by foreign companies in 2001.16

In addition, foreign companies also take advantage of experienced design 

teams in the United States. Companies can potentially benefit from having 

operations in key areas around the globe where innovation is occurring. 

These operations are able to access the experienced labor pool and new 

innovations occurring in a particular region and transfer those 

developments to their global operations. Silicon Valley, California, for 

instance, is widely known as a key center of innovation in the 

semiconductor industry.

Similarly, U.S. firms have invested in production capacity in Europe and 

Asia. However, according to industry experts, U.S. firms have generally not 

moved their R&D operations offshore. Data on patents and expenditures 

on R&D also indicate that U.S. semiconductor companies continue to 

locate their R&D work in the United States. Some industry analysts, 

though, are concerned that as production increasingly moves offshore to 

Taiwan and China, it will begin to draw more and more research activities 

with it. 

Industry experts also believe that most U.S. company design work is still 

conducted in the United States rather than offshore.17 According to these 

experts, U.S. companies are significant technology leaders in both the IDM 

16See Clair Brown and Greg Linden, “Offshoring in the Semiconductor Industry: A Historical 

Perspective” prepared for the 2005 Brookings Trade Forum on Offshoring of White-Collar 

Work (May 2005). Estimates are based on work by Robert Leachman and Chien Leachman, 

of the University of California at Berkeley.

17Systematic data on the location of design work, particular leading edge product 

innovation, is not readily available. Therefore, industry experts rely on the location of 

companies’ offices, patent data, and interviews with company officials to ascertain where 

design work is being carried out. 
Page 24 GAO-06-423 International Trade

and fabless design models. Although U.S. IDMs and fabless design 

companies operate globally, a larger share of their R&D and design work is 

conducted in the United States. Most of the fabless design firms are based 

in the United States, and many of the largest IDM’s are also U.S.-based. 

Also, the development of foundries, particularly in Taiwan, likely allowed a 

wider range of fabless companies to develop in the United States than may 

have been possible without the existence of foundries. This is because the 

high cost of fabrication plants acts as an entry barrier to smaller firms. At 

the same time, there are a growing number of fabless design firms in 

Canada, Israel, and Taiwan, and U.S. companies are also operating design 

offices in these countries. Thus, the global share of design work by fabless 

companies is becoming less concentrated in the United States.

U.S. Semiconductor Production 

Rebounding from 2001 

Recession, but Employment Has 

Remained Flat

U.S. production statistics show that the value of semiconductor production 

in the United States grew steadily during the 1990s even while offshoring 

expanded. U.S. production of semiconductors and related devices 

(measured by value-added) peaked in 1999 at about $68 billion, then 

declined steeply during the 2001 recession. It has since rebounded 

somewhat to $56 billion in 2004 (see fig. 3). 
Page 25 GAO-06-423 International Trade

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

Note: This figure shows output of the industry measured by value-added. Value-added measures the 

dollar value of output in an industry minus the dollar value of intermediate products and raw materials 

purchased from other industries. For example, semiconductor value-added does not include the value 

of the raw silicon used in the production of the wafers. The values shown above are in current dollars 

(unadjusted for inflation). Price indices at this level of industry detail were not available. However, we 

did examine how the results would change using a higher level industry (computer and electronic 

products) price index to adjust for inflation (or deflation). Due to declining prices over time in the 

broader industry, the inflation-adjusted trend was accentuated, such that the rise was much steeper, 

the decline between 2000 and 2002 was much shallower, and the industry has rebounded. Therefore, 

we found that our observation that the industry has grown rapidly and has rebounded since the 

recession is even stronger. 

U.S. employment in the semiconductor industry did not rebound after the 

2001 recession as production did. After a long decline from the mid-1980s 

through the early 1990s, U.S. semiconductor employment grew strongly 

through 2001 (see fig. 4). However, employment dropped sharply from a 

peak of about 292,000 in 2001 to around 226,000 employees in 2003. After 

hitting a trough in 2003, employment in the semiconductor industry has 

been stagnant, although overall U.S. employment across all industries 

resumed growth in 2004.

Dollars in billions

Year

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

0

10

20

30

40

50

60

70

80

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004
Page 26 GAO-06-423 International Trade

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

Employment in the semiconductor industry highlights the broader 

relationship between productivity growth and job declines in the U.S. 

manufacturing sector. Figure 5 shows an increase in productivity in the 

semiconductor and electronic components industry (a broader category 

than used in fig. 4) over the 15-year period from 1987. The pace of 

productivity growth sharply increased starting in late 1990s. Industry 

output continued to grow even after employment declined due to the 

increase in productivity (output per employee). 

Number of employees (in thousands)

Year

Source: Bureau of Labor Statistics.

0

50

100

150

200

250

300

350

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005
Page 27 GAO-06-423 International Trade

Figure 5: Labor Productivity, Employment and Compensation Trends in Semiconductors and Electronic Components 

Manufacturing, 1988–2004

Note: Productivity, employment, and compensation are presented here as indexes that represent their 

values at each year relative to the base year (1997).

The United States Is a Net 

Exporter of Semiconductors, 

Particularly High Value-Added 

Wafers and Chips

Since 2001, the United States has had a trade surplus in semiconductors, 

exporting more semiconductors and semiconductor components than it 

imported (see fig. 6). Both imports and exports grew rapidly from 1985 to 

1995. From 1995 to 1998, exports continued to grow while imports 

remained flat. From 1998 to 2000, both imports and exports increased again 

rapidly, peaking in 2000 at about $48 billion (imports) and $45 billion 

(exports). From 2001 to 2005, imports declined sharply to about $26 billion, 

while exports also declined, but then leveled out in 2003 to about $34 

billion. 

Index (1997=100)

Year

Source: Bureau of Labor Statistics.

Labor productivity index

Compensation index

Employment index

0

50

100

150

200

250

300

350

400

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004
Page 28 GAO-06-423 International Trade

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

Note: Trade values are presented in current dollars (unadjusted for inflation). Price indices for making 

inflation adjustments were not available for the entire time period. However, we did examine inflationadjusted constant dollar trade values for more recent years, and the findings in our analysis did not 

change.

The majority of U.S. exports of semiconductors consist of chips and 

wafers, which are used to produce finished integrated circuits in other 

countries. The top five destinations for U.S. semiconductor exports were 

all Asian locations: Malaysia (13 percent), Korea (12 percent), Philippines 

(11 percent), Taiwan (9 percent), and China (8 percent). Exports of U.S. 

chips and wafers are the result of the fabrication process, which involves 

some of the most technologically advanced manufacturing processes.

The majority of U.S. imports of semiconductors are finished integrated 

circuits (such as memory and logic integrated circuits), which are then 

used in other finished electronic goods, such as computers and cell phones. 

Finished integrated circuits are the result of chips and wafers being tested, 

-20

-10

0

10

20

30

40

50

60

19851986

1987

1988

1989

1990

1991

1992

19931994

1995

1996

1997

19981999

2000

2001

2002

2003

20042005

Dollars in billions

Imports

Exports

Trade balance

Year

Source: GAO analysis of U.S. Census Bureau trade statistics.
Page 29 GAO-06-423 International Trade

cut, and packaged by separate manufacturing plants usually located 

abroad. This process, although still technologically sophisticated (and less 

labor-intensive than in the past), is still significantly less advanced than the 

fabrication process. In 2005, only 13 percent of imports were chips and 

wafers whereas 71 percent of U.S. exports comprised chips and wafers. 

U.S. Exports to Asia Growing as 

Demand for Finished 

Semiconductors Expands in 

China

The decline in U.S. semiconductor imports since 2000 reflects the 

movement from the United States to Asia of manufacturing production of 

electronics products that use integrated circuits. Finished integrated 

circuits are moving to other countries in Asia, particularly China, for 

assembly into electronics products, rather than returning to the United 

States. Therefore, U.S. exports surpassed imports for the first time in 2001. 

Chinese trade statistics demonstrate the other end of this movement with 

Chinese imports of integrated circuits soaring over the last 10 years, 

making China one of the largest markets for integrated circuits in the 

world. Much of this increase has been supplied by Taiwan, Korea, Malaysia, 

Japan, the Philippines, and the United States (see fig. 7). Although the 

United States is sixth in terms of direct exporters to China, some portion of 

U.S. exports of chips and wafers are passing through other Asian countries 

for assembly and testing (including China) before use in China’s booming 

electronics industry. As mentioned above, the top destinations for U.S. 

wafer exports are Malaysia, Korea, Taiwan, the Philippines, and China. 

Those wafers are assembled and tested before being sent to electronics 

manufacturers for use in their products. These trade flows show the 

complex production chains that have developed across multiple countries.
Page 30 GAO-06-423 International Trade

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

Note: Trade statistics are presented in current U.S. dollars unadjusted for inflation since an appropriate 

price index for these imports is not available.

The shift in production and trade flows toward Asia has two consequences. 

First, because final production increasingly takes place in Asia, the United 

States imports an increasing share of electronics and telecommunications 

products (that use semiconductors). Appendix III shows that this is 

reflected in the growing U.S. trade deficit with Asia and China, in particular, 

including in advanced technology products. Second, as electronics and 

telecommunications production chains increasingly locate in Asia, there 

are benefits to U.S. producers of semiconductors to locate abroad near 

their customers and take advantage of the production clusters developing 

there. Therefore, this trend creates an incentive for U.S. companies to 

offshore some activities.

Year

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

0

5

10

15

20

25

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Dollars in billions

Malaysia

South Korea

Taiwan

Japan

Philippines

United States
Page 31 GAO-06-423 International Trade

The United States Is the 

Largest Global Supplier, 

Employer, and Market for 

Software Services

Although the industry is globalizing, the United States has maintained its 

leadership in the development and expansion of the software services 

industry. U.S. companies are global leaders in the packaged software and 

custom software services segments of the industry. Although statistics on 

software services are more limited than for semiconductor manufacturing, 

indicators show that the United States is a leading developer and consumer 

of software globally. U.S. production and employment data show that the 

industry has generally rebounded after declining during the 2001 recession. 

Also, while both imports and exports have grown rapidly, the United States 

maintains a trade surplus in software services.

The United States Is a Leading 

Software Developer and the 

Largest Supplier in the World 

The U.S. software industry is the largest in the world and plays a leadership 

role in the global market for software services. U.S. companies are 

disproportionately ranked among the largest in the world, both in terms of 

revenues and numbers of top firms.18 U.S. companies also benefit from the 

large U.S. domestic market, which by one industry estimate accounts for 

about 50 percent of global demand for packaged software and about 40 

percent of global demand for custom software services. U.S. software 

companies are also widely considered leaders in the development and 

delivery of leading-edge software services. According to industry experts, 

much of the development of these services takes place in the United States, 

although larger companies also employ teams of developers worldwide.

U.S. Software Production Has 

Rebounded from the 2001 

Recession

Although the industry experienced a downturn during the 2001 recession, it 

has since begun to recover. As figure 8 shows, the U.S. software industry 

grew rapidly through the late 1990s, declined during the 2001 recession 

and, as of 2004, had rebounded to its peak in 2000 based on industry 

revenue. Packaged software appears to be leading the rebound, while 

custom software revenues have remained flat since 2002.

18According to the Association of Computing Machinery (ACM), an industry association, 

U.S. firms make up 11 of the top 15 software companies (both packaged and custom 

services), with the remaining 4 companies from Germany, Japan, and France. See ACM, 

Globalization and Offshoring of Software: A Report of the ACM Job Migration Task Force

(www.acm.org, March 2006).
Page 32 GAO-06-423 International Trade

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

Note: Census industry classification changed from the Standard Industrial Classification (SIC) system 

in 1997 to the North American Industry Classification System (NAICS) in 1998. Therefore, there is a 

break in the series as indicated by the shaded area and dotted trend lines. Also, data on value-added 

for software services industries are not collected by the Bureau of the Census. Total revenue includes 

exports and is reported in current U.S. dollars (not adjusted for inflation). Price indices at this level of 

industry detail were not available. However, we did examine how the results would change using a 

higher level industry price index to adjust for inflation (or deflation). The higher level industries 

(publishing, which includes packaged software, and information and data processing services, which 

include custom software) experienced some inflation over this period and, therefore, after adjusting for 

inflation the growth in the software industry was somewhat reduced. However, our observations on the 

both the growth of the industry and its rebound since the recession were still consistent with the 

inflation-adjusted data.

U.S. Employment in Computer 

Specialist Occupations Has 

Grown Overall Since the 2001 

Recession

U.S. software industry employment is the largest in the world. According to 

one industry estimate, U.S. software employment makes up roughly about 

half of the global workforce in packaged software and about a third of the 

workforce employed in IT services industry, which includes custom

Year

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

Total revenue (dollars in billions)

Custom software

Total software services

Packaged software

Census industry classification change

0

20

40

60

80

100

120

140

160

180

200

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Page 33 GAO-06-423 International Trade

software services.19 As a group, software occupations, or computer 

specialists as designated by the Department of Labor’s Bureau of Labor 

Statistics (BLS), experienced relatively large gains in both employment and 

hourly wages from 2001 to May 2005 (the most recent time period for which 

comparable occupation-based data are available).20 This period largely 

coincided with an economic recovery following the 2001 recession.21 Table 

2 compares changes in employment and hourly wages for nine computer 

specialist occupations and that of all U.S. occupations. Seven of the 

occupations saw employment growth ranging from 1.1 percent to 46.9 

percent compared to 1.8 percent for all U.S. occupations. Employment for 

two occupations (computer programmers and database administrators22) 

declined by 22.4 percent and 4.7 percent, respectively, from 2001 to May 

2005. The wages for these occupations also increased more slowly than the 

wages for all U.S. occupations. Hourly wages for five occupations 

increased more slowly than the wages for all U.S. occupations, increasing 

by 3.5 percent to 10.5 percent compared with 11.4 percent for all U.S. 

occupations. Wages for four occupations, however, increased faster than 

the wages for all U.S. occupations, rising by 12 percent to 22.2 percent. 

19See McKinsey Global Institute, The Emerging Global Labor Market: Part I—The Demand 

for Offshore Talent in Services (www.mckinsey.com/mgi: June 2005).

20In November 2002, BLS’s Occupational Employment Statistics Survey changed from an 

annual survey to a semiannual survey.

21The National Bureau of Economic Research's Business Cycle Dating Committee 

determined that a trough in business activity occurred in the U.S. economy in November 

2001 marking the end of the recession that began in March that year.

22Database administrators identify user requirements and set up and administer computer 

database systems.
Page 34 GAO-06-423 International Trade

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

Occupations

Source: Occupational Employment Statistics Survey, BLS. 

Note: Occupations are ranked by hourly wage.

Computer software engineers (including systems software and applications 

engineers, two high-wage occupations) saw modest increases in wages but 

relatively large increases in employment, growing by 22.6 and 26.1 percent, 

respectively. Computer software engineers design, develop, and test the 

software and computer systems, applying computer science, mathematics, 

and engineering expertise. The integration of Internet technologies and the 

rapid growth in e-commerce have led to a rising demand for computer 

software engineers. Although hourly wages of network systems and data 

communications analysts increased by a relatively low 7.7 percent, their 

job growth was the largest of all computer specialist occupations at 46.9 

percent. This group of computer specialists designs, tests, and evaluates 

network systems and other data communications systems. 

Occupations 

Hourly 

wage (May 

2005)

Percentage 

change in 

hourly wage

(2001-May 

2005)

Number of 

jobs (May 

2005)

Percentage 

change in 

employment

(2001-May 2005)

Computer and 

information scientists, 

research $45.21 22.2% 25,890 1.1 %

Computer software 

engineers, systems 

software 40.54 13.2 320,720 22.6

Computer software 

engineers, applications 38.24 9.9 455,980 26.1

Computer systems 

analysts 33.86 10.5 492,120 9.8

Computer programmers 32.40 7.2 389,090 -22.4

Database administrators 31.54 12.3 99,380 -4.7

Network systems and 

data communications 

analysts 31.23 7.7 185,190 46.9

Network and computer 

systems administrators 30.39 12.0 270,330 18.6

Computer support 

specialists 20.86 3.5 499,860 1.3

All U.S. occupations $18.21 11.4% 130,307,850 1.8%
Page 35 GAO-06-423 International Trade

According to BLS, employment in computer specialist occupations, apart 

from computer programmers, is projected to grow much faster than overall 

U.S. employment.23 Although total U.S. employment is projected to grow 13 

percent over the 2004 to 2014 period, employment of computer specialists 

is projected to grow 31.4 percent (see fig. 9). BLS projects that the demand 

for computer-related jobs is likely to increase as employers continue to 

adopt and integrate increasingly sophisticated and complex technologies. 

Growth, however, will not be as fast as the previous decade, as the 

software industry matures, and as routine work is increasingly offshored. 

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

23Daniel Hecker, “Occupational Employment Projection to 2014,” Monthly Labor Review, 

November 2005, Bureau of Labor Statistics.

0 10 20 30 40 50 60

Computer and information scientists, research

Computer programmers

Computer software engineers, applications

Computer software engineers, systems software

Computer support specialists

Computer systems analysts

Database administrators

Network and computer systems administrators

Network systems and data communications analysts

Total computer specialists

All occupations

Percentage

Source: BEA.
Page 36 GAO-06-423 International Trade

Projected job growth for computer software engineers and network 

systems and data communications analysts is especially robust. The BLS’s 

Occupational Outlook Handbook suggests that demand for workers with 

specialized technological skills is expected to increase sharply as 

employers use and improve the efficiency of new technologies. As the race 

for increasingly sophisticated technological innovations continues, the 

need for more highly skilled workers to implement these innovations will 

continue. More highly skilled computer specialists will be needed as 

businesses and other organizations try to manage, upgrade, and customize 

their increasingly complicated computer systems. Computer specialists 

who have a combination of strong technical and good interpersonal and 

business skills will be in demand.

Unlike other computer specialists, job growth of computer programmers is 

expected to lag significantly behind the growth in overall U.S. occupations. 

Programmers are projected to grow only by 2 percent from 2004 to 2014. 

Because computer programming requires little localized or specialized 

knowledge, computer programming can be performed anywhere in the 

world and transmitted electronically. Consequently, programmers 

potentially face a higher risk of having their jobs offshored than other 

computer specialists such as software engineers, who are involved in more 

complex information technology functions. Another factor limiting job 

growth in computer programming is progress in programming technology. 

Computer software has become increasingly sophisticated, enabling users 

to write basic code without programmers’ involvement for routine 

programming. 

The United States Maintains a 

Trade Surplus in Software 

Services Trade, but Imports Are 

Growing

The United States is a net exporter of software services and has maintained 

this trade surplus for several decades. Although U.S. exports are rising 

rapidly, imports are also increasing in this category. Canada is the largest 

supplier of imported computer and data processing services to the U.S. 

market but, as we have previously reported, India is rapidly growing as a 

supplier of these services.24 Figure 10 shows U.S. exports and imports of 

computer and data processing services, the category that includes both 

custom and packaged software services (as defined by BEA) since 1986. 

24See GAO-06-116. This report also highlights limitations in the data of services trade and the 

significantly larger exports statistics reported by India.
Page 37 GAO-06-423 International Trade

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

Note: The values are for unaffiliated transactions—sales between companies located in the United 

States and unrelated third party providers or purchasers located abroad. Statistics on both affiliated 

and unaffiliated transactions in this product category are only available since 2001. However, these 

data show that United States also maintains a trade surplus in overall (affiliated and unaffiliated) 

computer and data processing services from 2001-2004.

U.S. exports of software services make up about 13 percent of overall U.S. 

software revenues according to the U.S. Census Bureau (Census). 

However, most export revenue is derived from packaged software exports. 

These Census statistics show a much larger value of exports than the BEA 

trade in services statistics.25 As shown in figure 11, U.S. companies report 

Dollars in billions

Year

Source: BEA.

U.S. imports

U.S. exports

0

1

2

3

4

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

25BEA reported U.S. affiliated and unaffiliated exports of computer and information services 

(which includes computer and data processing services) at $8.5 billion in 2004. Census 

reported U.S. exports by custom computer programming services and software publishers 

at $21.6 billion. Some of this discrepancy is accounted for by differences in the treatment of 

packaged software, classifications, and survey samples. For example, BEA’s statistics 

exclude computer software that is physically shipped and considered a good rather than a 

service. 
Page 38 GAO-06-423 International Trade

nearly $22 billion in exports of software services, primarily comprising 

about $20 billion in U.S. package software exports. 

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

Information on trade in software services is significantly more limited than 

information on trade in semiconductors. Although both BEA and Census 

collect statistics on software trade, as demonstrated by the previous two 

figures, the data are available only for the aggregate categories shown. In 

comparison, for semiconductors, over 230 individual semiconductor goods 

are identified by Census as they cross international borders. In addition, 

most countries in the world utilize the same goods classification system, 

known as the Harmonized System, to record trade in goods. However, 

efforts to create and utilize detailed and compatible classification systems

Year

Source: Census.

Dollars in billions

Package software exports

Total software exports

Custom software exports

0

5

10

15

20

25

1998 1999 2000 2001 2002 2003 2004
Page 39 GAO-06-423 International Trade

across countries for services such as software are still relatively new.26 Part 

of the challenge in collecting detailed statistics on services industries, such 

as software, derives from the “intangible” nature of many services—they 

are not necessarily physical products—and the fact that they don’t cross 

customs borders like goods. Rather, services data is collected by surveying 

companies for information on their payments or receipts for services. In 

addition, services can be delivered to the customer through many different 

channels, including licensing agreements, imbedded in goods such as 

computers, or a commercial presence such as a foreign subsidiary. 

The U.S. Semiconductor and 

Software Industries Benefit 

from the Large, Innovative 

U.S. Economy

The United States maintains substantial advantages as a large, 

technologically sophisticated economy. The U.S. high-technology 

industries, such as semiconductors and software, have benefited from a 

U.S. economic environment that supports innovation—world-class 

universities and research centers, a talented labor pool, and high levels of 

spending on R&D. The industries also benefited from a competitive U.S. 

business environment, an efficient legal system for contracts and 

intellectual property protection, and a large domestic market.27 

University and Research Centers, 

Talented Labor, and R&D 

Investment Have Helped Foster 

Innovation

Although a wide range of causes and circumstances leads to new 

innovations, certain enabling factors create an environment that fosters 

new ideas and their development. These include (but are not limited to) 

such factors as the higher education system and related research centers, 

pools of talent available, and the investments in research and 

development.28

26For example, see the discussion of the discrepancies between U.S. and Indian services 

trade data in GAO-06-116.

27However, measuring the individual contribution of any one of these factors on the 

development of the semiconductor and software industries, as well as their future 

importance to these industries, is beyond the scope of this report. 

28Although we discuss several indicators of innovation in this section, there are a variety of 

measures available. See for example, National Science Board, Science and Engineering 

Indicators, 2006 (Washington, D.C.: National Science Foundation, 2006) available at

www.nsf.gov. Also, it is important to note that each of these indicators provides only a 

limited measure of certain aspects of innovation, which is a broad and elusive concept. For 

a comparison of R&D globalization across countries, see Swedish Institute for Growth 

Policy Studies, The Internationalization of Corporate R&D (Stockholm, ITPS, 2006) 

available at www.itps.se. 
Page 40 GAO-06-423 International Trade

The U.S.’s world-class higher education system and research institutes 

create communities for researchers and educators and are widely 

considered a key competitive advantage. The higher education system in 

the United States includes many universities that are ranked among the 

best in the world in terms of research, education, and entrepreneurship. 

Also, a large number of top applicants from around the world apply for 

undergraduate, graduate, and postdoctoral study. More specifically, U.S. 

computer science and engineering programs—of particular importance to 

high-technology industries such as semiconductors and software—are 

leaders in their fields. The higher education system has provided both a 

strong research environment and a pool of talented labor—both native 

born and foreign students who remained after education. 

A second factor that fosters innovation is the quality and number of 

available researchers and other skilled labor. Countries with larger and 

more talented labor pools are more likely to foster and sustain innovation. 

The United States has a world-class talent pool that includes both technical 

and managerial talent. The United States has the largest number of 

researchers worldwide, with about 1.3 million, followed closely by the 

European Union (EU-25), according to data from the Organization for 

Economic Cooperation and Development. China, ranked third, has rapidly 

increased the number of its researchers to surpass Japan. Although the 

quality of these researchers is not captured by the indicator, it does show 

the growing size of the Chinese research community. 

A third factor that fosters innovation is a country’s investment in research 

and development. This investment may come from several sources, 

including the government, academia, and business. U.S. expenditures on 

R&D are the largest in the world and have continued to grow over time (see 

fig. 12). Currently, the United States spends about 2.7 percent of its gross 

domestic product on R&D expenditures, compared with about 3.2 percent 

for Japan and 1.4 percent for China. For certain industries such as 

semiconductors, early investments by the federal government—the 

military, in particular—have been key in the initial development of the 

industry. However, this role may change over time. For the United States, 

the increase in R&D expenditures over the past decade has been driven by 

the business community, while the total amount of federal R&D has grown 

much more slowly in comparison. 
Page 41 GAO-06-423 International Trade

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

1990–2004

Note: 2000 PPP$ refers to gross expenditure data converted from national currencies (e.g., the Yen) 

into inflation-adjusted year 2000 U.S. dollars based on purchasing power parity (PPP) conversion 

factors. PPP conversion factors take into account differences in the relative prices of goods and 

services and differ from market exchange rates. Data on EU-25 R&D expenditures prior to 1995 are 

not available.

0

50

100

150

200

250

300

350

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Dollars in billions (2000 PPP$)

Year

Taiwan

Korea

China

Japan

EU25

United States

Source: Organization for Economic Cooperation and Development, Main Science and Technology Indicators, 2005.
Page 42 GAO-06-423 International Trade

While the United States has generally maintained a strong advantage in 

areas that foster innovation, several studies have recently raised questions 

about continued dominance of the United States in cutting-edge 

innovation.29 They cite a range factors that indicate the rise of other 

competitors in traditionally U.S.-dominated areas. For instance, changes in 

U.S. visa and immigration requirements have been cited as hampering the 

number of foreign students, researchers, and high-tech workers who are 

attracted to the United States and allowed to reside here.30 At the same 

time, other countries’ university systems are increasingly competing with 

the United States to attract the most qualified students and researchers. 

According to these studies, these changes have led to a decline in the 

number of university applications from foreign students. Similarly, other 

countries have liberalized their economies and provided greater 

opportunities for higher skilled workers. Therefore, more students and 

researchers, including those from India and China, who may have once 

stayed in the United States have an incentive to return to their native 

countries. 

Business Environment, Legal 

System, and Domestic Market 

Affect Commercialization of 

Innovation

In addition to an environment for fostering innovation, countries need to be 

able to commercialize these innovations to affect the wider economy. 

Several factors contribute to a U.S. competitive environment that 

encourages innovation to be commercialized. First, the business 

environment includes relatively competitive product markets that 

encourage businesses to take new products to market in order to gain 

advantage over rivals, while also allowing new entrants to challenge 

existing companies. The United States also has a relatively efficient 

financial system, including venture capital markets that fund new 

innovations and start-ups in high-technology industries. The U.S. legal and 

regulatory environment, including its intellectual property protections 

29See, for example, Rising Above The Gathering Storm: Energizing and Employing 

America for a Brighter Economic Future (Washington, D.C.: National Academy Press, 

February 2006), America’s Pressing Challenge – Building a Stronger Foundation: A 

Companion to Science and Engineering Indicators 2006 (Washington, D.C.: National 

Science Board, January 2006), and Sustaining the Nation’s Innovation Ecosystems, Report 

on Information Technology Manufacturing and Competitiveness, (Washington, D.C.: 

President’s Council of Advisors on Science and Technology, January 2004).

30For additional information of the U.S. visa program, see GAO, Border Security: 

Streamlined Visas Mantis Program Has Lowered Burden on Foreign Science Students 

and Scholars, but Further Refinements Needed, GAO-05-198 (Washington, D.C.: Feb. 18, 

2005) and GAO, Border Security: Improvements Needed to Reduce Time Taken to 

Adjudicate Visas for Science Students and Scholars, GAO-04-371 (Washington D.C.: Feb. 

25, 2004).
Page 43 GAO-06-423 International Trade

(such as patents), allows individuals and companies to be rewarded for 

their investment in innovation. Finally, the large U.S. domestic market 

provides an avenue for companies to sell new products to a wide range of 

sophisticated customers. The U.S. economy is by far the largest in the 

world, and per capita income is also one of the highest in the world. This 

creates an environment for U.S. companies to develop and sell new 

products profitably. In addition, companies that are close to their 

customers are able to spot new trends and preferences in demand and 

cater to them. This is particularly true in high-technology industries in 

which the product life cycle is relatively short and profit margin for older 

products declines quickly.

Concluding 

Observations

The past decade’s revolution in telecommunications and related advances 

in supply chain management capabilities have deeply affected the business 

models for both the semiconductor manufacturing and software services 

industries. These industries’ overall business model is now a global one, in 

which U.S. firms regularly consider a wide range of locations for their 

operations and source different parts of their operations wherever the 

advantages are most compelling. For the semiconductor industry, firms 

initially offshored labor-intensive assembly activities to cut labor costs, but 

more recently firms have offshored other activities for various reasons, 

including proximity to other industry suppliers, closer relations with 

foreign customers, benefits offered by foreign governments, and the 

availability of both skilled and unskilled human capital. In the software 

industry, the offshoring trend is more recent, but the motivations are 

similar. 

For software services, however, an important difference may be the 

possible speed and scale of employment shifts. Software services 

offshoring, compared with semiconductor manufacturing offshoring, does 

not need the same physical infrastructure, such as ports, roads, and 

factories, and thus can be set up more quickly. It is more labor intensive 

than capital intensive, and thus may be more sensitive to wage differentials. 

In addition, service occupations related to software programming are large 

in comparison to manufacturing jobs in the semiconductor industry. In 

semiconductor manufacturing, there was relatively slow movement up the 

value chain as firms invested in the overseas workforce and factory 

facilities. India’s software industry development has advanced more 

quickly, with rapid technological changes bringing large numbers of highly 

educated, but underused, English-speaking workers to the doorstep of 

firms willing to operate from India. The data available to monitor the scale 
Page 44 GAO-06-423 International Trade

of services offshoring, unfortunately, are much more limited than those 

available for following trade in manufactured products. Semiconductor 

products, for example, can be identified and inspected at U.S. borders, 

whereas software imports and exports can be transmitted almost 

instantaneously over the Internet.

Government policies also played important, but different, roles in Taiwan, 

China, and India; however, all three governments have placed high 

importance on education. In recent years, China has been transforming 

large parts of its coastal cities through massive infrastructure investments 

and has provided more targeted inducements for firms, such as support for 

science and technology parks and various types of financial assistance. 

India liberalized parts of its central government apparatus in the early 

1990s, but its investment in physical infrastructure such as roads and ports 

has been much more limited, although India has also supported its science 

parks and put in place advanced telecommunications infrastructure 

improvements. These incentives for software exporters appear to have 

been well targeted. 

The comparison of these two offshoring experiences offers some insights 

for U.S. policies. Clearly, a large and well-educated population appears to 

be a central element to success in both semiconductor manufacturing and 

software services activities. Also, technological changes have impacts that 

are not always predictable and, in a now closely-connected global business 

world, such changes can have continuing dynamic effects on U.S. 

industries. India may have neither fully predicted or planned its current 

strengths in software services, nor foreseen how its pool of native English 

speakers could be such an asset, but it now realizes the importance of 

enhancing its strengths in these areas. In addition, ambitious national 

goals—whether China’s semiconductor development road maps or Indian 

businesses’ long-term strategies—are additional elements in the mix of 

factors that will shape these countries’ futures and will pose competitive 

challenges to U.S. firms. 

As numerous recent studies have reported, the ability of the United States 

to continue to compete at the most advanced levels in high technology 

industries depends on a range of reinforcing factors: high-level R&D 

investment by companies and government, innovative academic 

environments attracting and training the highest-skilled researchers, a 

competitive business environment that fosters development and 

commercial application of new technologies, and a flexible and skilled 

workforce. These factors are being nourished in China, Taiwan, and India, 
Page 45 GAO-06-423 International Trade

as these countries seek to move further up the value chain and to “leapfrog” 

advanced country capabilities where possible. Indeed, these countries have 

modeled their industry development strategies on various aspects of the 

U.S.’s successful model. The United States is an integral part of this 

dynamic world economy—in which it will be important for U.S. businesses 

and policymakers to keep alert to technological changes, to anticipate 

competitor countries’ strategies, and to preserve and enhance the elements 

of the innovation environment that helped make the United States a model.

Agency Comments and 

Our Evaluation

We provided a draft of this report to the Departments of State and 

Commerce for their review and comment. The Department of State did not 

provide comments. We received written comments from the Department of 

Commerce, which agreed our findings. (See app. IV.) The Department of 

Commerce also provided technical comments, which we incorporated into 

the report, as appropriate.

We are sending copies of this report to interested congressional 

committees and the Departments of State and Commerce. We also will 

make copies available to others on request. In addition, the report will be 

available at no charge on the GAO Web site at http://www.gao.gov. 

If you or your staff have any questions about this report, please contact me 

at (202) 512-4128 or yagerl@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. Key contributors to this report are listed in appendix V.

Loren Yager

Director, International Affairs and Trade
Page 46 GAO-06-423 International Trade

List of Committees

The Honorable Max Baucus

Ranking Minority Member

Committee on Finance

United States Senate

The Honorable Henry A. Waxman

Ranking Minority Member

Committee on Government Reform

House of Representatives

The Honorable Charles Rangel

Ranking Minority Member

Committee on Ways and Means

House of Representatives

The Honorable Bart Gordon

Ranking Minority Member

Committee on Science

House of Representatives
Page 47 GAO-06-423 International Trade

Appendix I

Scope and Methodology AAppenednxidexiIs

This report discusses (1) the development of offshoring in semiconductor 

manufacturing and software services over time, (2) the factors enabling the 

expansion of offshoring in these industries, and (3) the development of 

these industries in the United States as they have become more global. 

To obtain information about the key developments in the offshoring of 

semiconductor manufacturing and software services, we reviewed 

available literature; attended conferences on the subject; and interviewed 

government officials, representatives of private firms, industry 

associations, and research organizations in China, India, Taiwan, and the 

United States. We performed a literature search and obtained information 

from several research organizations, universities, and industry associations 

that have published industrywide studies on offshoring and the key 

developments in both the semiconductor manufacturing and software 

services industries, including the Association for Computing Machinery; 

Brookings Institution; Gartner, Inc.; McKinsey and Company; the 

University of California, Berkeley; Stanford University; Carnegie Mellon 

University; the Semiconductor Industry Association; and the Information 

Technology Association of America. We attended conferences on 

developments in the semiconductor and software services industries and 

the general offshoring phenomenon. We interviewed researchers at private 

research organizations, industry experts at the U.S. Department of 

Commerce and the U.S. International Trade Commission, and government 

officials from India and Taiwan. In addition, we met representatives of 

private sector firms in the semiconductor and software services industries 

in China, India, Taiwan, and the United States. We also interviewed 

representatives and obtained data from organizations representing 

semiconductor and software services firms and workers, including the 

Semiconductor Industry Association, the National Association of Software 

and Service Companies, and the Information Technology Association of 

America. We discussed with these sources the historical changes that have 

occurred broadly in the computer hardware industry, particularly with 

respect to China and Taiwan, and the software services industry, 

particularly with regard to India. 

To determine the factors that have contributed to offshoring in 

semiconductor manufacturing and software services, we conducted a 

review of available literature and interviewed representatives of private 

sector firms, semiconductor and software services industry associations, 

business associations, and research organizations (see above). In addition, 

we interviewed industry experts within the U.S. government and the 

governments of India and Taiwan. We met with and reviewed relevant 
Appendix I

Scope and Methodology

Page 48 GAO-06-423 International Trade

literature from researchers who have published on the offshoring 

phenomenon and the factors contributing to global developments in 

semiconductor manufacturing and software services; including experts 

from the Brookings Institution; the Institute for International Economics; 

the Milken Institute; and the University of California, Berkeley. We 

interviewed representatives of private sector firms in China, India, Taiwan, 

and the United States that have globally sourced semiconductor 

manufacturing and software services; trade and industry experts in the U.S. 

Department of Commerce; and the governments of India and Taiwan. In 

addition, we interviewed representatives of business and industry 

associations, such as the Federation of Indian Chambers of Commerce and 

Industry, the U.S.-Taiwan Business Council, and the Semiconductor 

Industry Association. 

To determine developments in the semiconductor and software services 

industries in the United States as they have become more global, we 

examined available government data, information from experts in both the 

semiconductor and software services industries, and other private sector 

research. We obtained U.S. international trade data from the Bureau of 

Economic Analysis (BEA) and the U.S Census Bureau. We also obtained 

foreign countries’ international trade data through the United Nations and a 

private company, Global Trade Information Services. We obtained foreign 

direct investment data from BEA and domestic production data from 

Census. To assess the limitations and the reliability of various data series, 

we reviewed technical notes and related documentation and met with 

officials from BEA and Census, as well as individuals in the private sector 

familiar with these data. In addition, we reviewed relevant research studies 

and obtained data from several private sector entities. Although we do not 

report these data directly, we used them to corroborate information from 

other sources. To determine employment trends in the semiconductor and 

software services industries, we analyzed available U.S. government 

employment data from the Bureau of Labor Statistics (BLS). We crosschecked various employment data and reviewed technical notes in BLS 

publications to assess the limitations and reliability of these data. We also 

discussed the limitations and reliability of BLS data with BLS officials. We 

determined that the data we used in this report to show the development 

and trends in the semiconductor and software industries were sufficiently 

reliable for these purposes.

We conducted our review from October 2005 through August 2006 in 

accordance with generally accepted government auditing standards. 
Page 49 GAO-06-423 International Trade

Appendix II

U.S. Multinational Companies’ Investment and 

Operations in the Semiconductor and 

Software Industries ApendxiI

U.S. multinational companies’ worldwide investments and operations 

(including production, employment, and research and development (R&D) 

have played an important role in the globalization of the semiconductor 

and software industries.1

 U.S. statistics show that overall multinational 

corporation (MNC) investments have still tended to be in developed 

economies, rather than in developing economies such as India and China. 

However, certain manufacturing sectors such as the computer and 

electronic products industry (including semiconductors) have a relatively 

higher share of investment, production, and employment in developing 

countries. In particular, U.S. companies’ investments and production in this 

industry are relatively higher in the Asia-Pacific region (particularly 

Singapore) than other industries. Employment is even more concentrated 

abroad—likely due to the movement of more labor-intensive production 

operations overseas in order to reduce costs. Conversely, research and 

development expenditures are much more concentrated in the United 

States than they are in foreign affiliates.

In recent years, U.S. 

Investment Offshore Has 

Been Relatively Stable and 

Has Been Larger in 

Singapore and Malaysia, 

Than in Taiwan and China

U.S. direct investment abroad statistics show that overall U.S. investment 

(across all industries) in developing country markets is still a relatively 

small share of total U.S. direct investment abroad (less than 1 percent of 

the total each for India, China, and other developing countries, except 

Mexico and Brazil), according to statistics from the Bureau of Economic 

Analysis (BEA).2

 However, within the computer and electronic products 

industry (which includes semiconductors),3 Singapore was the most 

significant Asia-Pacific country accounting for 15 percent of U.S. global

1

Investment abroad—establishing a foreign located affiliate of a parent company—is one 

means of offshoring parts of the production process. The other main means is to contract 

with an independent company, which is not captured in investment statistics. In addition, 

companies may devise hybrids of these two approaches, such as establishing a joint venture. 

Information provided in this appendix only relates to offshoring through a foreign affiliate 

and not offshoring that may occur through an unaffiliated provider that replaces domestic 

production and employment. For more information on definitions of offshoring, see GAO04-932, appendix II.

2

Direct investment abroad statistics on an historic cost basis, as reported here, will exclude 

the value of U.S. investments in particular countries if that investment is made through 

holding companies located in other countries. The U.S. investment will be attributed to the 

country of the holding company. 

3

Detailed direct investment abroad statistics on the semiconductor industry by country are 

not available. 
Appendix II

U.S. Multinational Companies’ Investment 

and Operations in the Semiconductor and 

Software Industries

Page 50 GAO-06-423 International Trade

investment in that industry as of 2004.4 Malaysia and Japan were next with 

about 5 percent; followed by Korea (4 percent); Taiwan (3 percent); and 

China, Hong Kong, and the Philippines (2 percent, each). Figure 13 shows 

the value of U.S. foreign direct investment (FDI) from 1999 to 2004 in this 

industry for selected Asian countries. As figure 13 shows, Singapore 

accounted for $8.8 billion in U.S. FDI in 2004 (down from $13.5 billion in 

2001), or about 15 percent of the global total in this industry. Interestingly, 

the value of U.S. FDI in China in this sector has fallen since 2001—more 

significantly than for other countries, except Singapore. These data 

represent the accumulated investments (stock) made by U.S companies in 

the computer and electronic products industry. As discussed in this report, 

U.S. companies moved labor-intensive assembly and testing operations 

overseas over the past several decades. Also, U.S. exports of 

semiconductor wafers were largest to Malaysia, Korea, Taiwan, 

Philippines, and China. This reflects the production process in which 

fabricated wafers are then sent overseas for final assembly and test by U.S. 

companies’ affiliates (as well as unaffiliated contractors).

4

Singapore was the largest location of U.S. direct investment abroad as of 2004 in this 

industry. Ireland (12 percent), Canada (10 percent), and Italy (10 percent) were the next 

largest locations by value. 
Appendix II

U.S. Multinational Companies’ Investment 

and Operations in the Semiconductor and 

Software Industries

Page 51 GAO-06-423 International Trade

Figure 13: U.S. Direct Investment Abroad in the Computers and Electronic Products 

Industry, Selected Asian Countries, 1999–2004 

Note: U.S. direct investment abroad is the stock of U.S. investments in a particular country valued in a 

historical cost basis. The computer and electronic products industry includes semiconductor 

production. However, detailed investment statistics by country for the semiconductor industry are not 

available.

Within the semiconductor industry, the majority of U.S. companies’ global 

production (as measured by value-added) remained in the United States, 

although the share declined during the recent recession. As figure 14 

shows, semiconductor value-added by U.S. parents (U.S. operations) took a 

steep decline in 2001, remained flat in 2002, and rebounded somewhat in 

2003. Value-added by U.S. companies’ affiliates abroad accounted for about 

28 percent of U.S. MNC’s global production, while the Asia-Pacific region 

(excluding Japan and Australia), in particular, accounted for about 9 

percent of global production. 

Year

Source: BEA.

Dollars in billions

South Korea

China

Japan

Singapore

Taiwan

Malaysia

0

2

4

6

8

10

12

14

16

1999 2000 2001 2002 2003 2004
Appendix II

U.S. Multinational Companies’ Investment 

and Operations in the Semiconductor and 

Software Industries

Page 52 GAO-06-423 International Trade

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

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

Global Semiconductor 

Employment by U.S. 

Companies Is Roughly Split 

between Their U.S. 

Operations and Offshore 

Locations

U.S. MNCs that operate affiliates offshore have overall split their 

employment between their U.S. operations and their foreign affiliates. 

According to data from BEA, about 53 percent of MNC’s global 

semiconductor employment was located in offshore affiliates in 2003, up 

from 49 percent in 1999.5

 As previously discussed, this reflects the trend 

begun in 1960s of U.S. companies’ offshoring much of their labor-intensive 

assembly and testing operations to lower wage countries, particularly in 

Asia. BEA statistics also show that a relatively higher share of U.S. 

Source: BEA.

Dollars in billions

MOFA value-added—all countries

Parents value-added

MOFA value-added—Asia (excluding Japan/Australia)

0

10

20

30

40

50

60

1999 2000 2001 2002 2003

MOFA value-added—all countries

Parents value-added

MOFA value-added—Asia (excluding Japan/Australia)

13,419

4,122

39,053

15,920

5,818

53,057

14,123

4,230

21,788

11,919

3,908

21,172

12,091

3,812

30,625

5

BEA data include total employment in U.S. MNC’s parent operations (located in the United 

States) and majority-owned foreign affiliates (located in foreign countries).
Appendix II

U.S. Multinational Companies’ Investment 

and Operations in the Semiconductor and 

Software Industries

Page 53 GAO-06-423 International Trade

employment in semiconductor manufacturing is concentrated in Asia 

compared with other industries. Similarly, U.S. MNCs in computer and 

electronic product manufacturing industries (of which semiconductors is a 

part), in general had relatively higher shares of their global employment 

located abroad (about 38 percent) than other information and 

communications technology industries such as computer system design 

and related services (35 percent), as well as across all industries (28 

percent) in 2003. 

Employment statistics from the Semiconductor Industry Association (SIA) 

show a similar pattern for U.S.-based companies.6

 According to SIA, about 

54 percent of U.S. companies’ semiconductor employment was located in 

North America (mainly the United States) in 2004. This is down from a peak 

of about 60 percent in 1998 but still higher than in the 1980s and 1990s, 

which was between 45 and 50 percent. In addition, about 28 percent of U.S. 

companies’ North American workforce was engaged in R&D in 2004. 

According to industry experts, a much higher share of U.S. companies’ 

R&D employment is based in the United States, rather than offshore.

U.S. Companies 

Investments in Overseas 

Affiliates to Supply 

Software Services Still 

Relatively Low

As discussed above, U.S. direct investment abroad statistics show that 

overall investment (across all industries) in developing country markets is 

still a relatively small share of total U.S. direct investment abroad. This is 

also generally true in services industries that include software services.7

For example, U.S. direct investment in India in the information sector and 

the professional, scientific, and technical services sector are both less than 

1 percent of global investment in those sectors. However, investment in 

Ireland in the information sector accounted for 30 percent of global U.S. 

direct investment abroad in that sector in 2004. Over time, Ireland has 

attracted investment by a large number of U.S. companies to produce 

software for the European Union market. 

6

BEA’s statistics capture U.S. MNCs and their majority-owned foreign affiliates in the 

semiconductor and other electronic components sector. SIA’s statistics capture all U.S.-

based semiconductor companies (whether or not they have foreign affiliates) and their 

entire employment abroad (which may include less than majority ownership). The two 

statistics differ to some degree in terms of their definition of the industry and selection of 

parent companies and affiliates.

7

Software publishing that produces packaged software is included in the broad industry 

sector of Information, while custom software services is included in the broader industry 

sector of professional, scientific, and technical services. U.S. direct investment data by 

country are not available below the industry sector level of detail.
Appendix II

U.S. Multinational Companies’ Investment 

and Operations in the Semiconductor and 

Software Industries

Page 54 GAO-06-423 International Trade

Similarly, U.S. multinational companies’ operations abroad (including 

employment) in software services are relatively small compared with the 

semiconductor industry and the broader electronics hardware industry. For 

example, table 3 shows that, for semiconductors, over half of U.S. MNC’s 

employment was located in their foreign affiliates (rather than their 

domestically based parent company). In contrast, services industries such 

as publishing (which includes packaged software) and computer systems 

design and related services (which includes custom software) had between 

one-fifth and one-third of their employment located in their foreign 

affiliates.

Table 3: Share of U.S. Foreign Affiliates’ Employment in Total U.S. MNC Employment 

Worldwide—ICT Sector Industries, 1999–2003

Source: BEA.

Note: Shares are calculated by dividing U.S. foreign affiliates’ employment by total U.S. MNC 

employment, which is the sum of U.S. foreign affiliates and U.S. parent company employment. Data for 

2003 are preliminary. ICT-producing industries include computer and electronic products 

manufacturing, publishing industries (includes software), information and data processing services, 

and computer systems design and related services.

Industry 1999 2000 2001 2002 2003

ICT-producing industries 55% 53% 51% 49% 49%

Computers and 

electronic products 43 40 40 39 38

Semiconductors and 

other electronic 

components 49 52 53 53 53

Publishing industries 

(including packaged 

software) 14 16 17 18 18

Information services 

and data processing 

services 29 29 28 28 27

Computer systems 

design and related 

services (including 

custom software 29 31 32 32 35

All industries (total) 25% 25% 26% 27% 28%
Appendix II

U.S. Multinational Companies’ Investment 

and Operations in the Semiconductor and 

Software Industries

Page 55 GAO-06-423 International Trade

MNC’s Research and 

Development Relatively 

Concentrated in U.S. 

Operations

Compared with production or employment, U.S. MNC R&D expenditures 

are more concentrated in the United States. As shown in table 4, in 2003 

about 14 percent of U.S. MNC R&D expenditures were made through U.S. 

majority-owned foreign affiliates (MOFAs) out of total MNC R&D 

expenditures (U.S. parents plus MOFAs). The share was similar for the 

computer and electronic products industry (about 13 percent) and 

publishing industries (about 10 percent) but less for semiconductors (8 

percent), computer systems design and related services (about 5 percent), 

and information services and data processing services (1 percent). In 

comparison, MOFAs accounted for about 26 percent of value-added for all 

industries, 24 percent for computer and electronic products, and 28 percent 

for semiconductors. Likewise, MOFAs accounted for 28 percent of 

employment across all industries, 38 percent for computer and electronic 

products, and 53 percent of semiconductor employment. 

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

Source: BEA.

Note: Data for 2003 are preliminary. “N/A” indicates that the data have been suppressed by BEA to 

avoid disclosure of data of individual companies.

Across industries, MNCs spent about 22 percent of MOFA R&D 

expenditures in the computer and electronic products industry (5 percent 

in semiconductors alone), making it the third largest industry overall in 

2003. Other information and computer technology (ICT) sectors 

represented very small shares (see table 5). Across major industries, 

transportation equipment manufacturing accounted for 29 percent of total 

MOFA R&D expenditures (26 percent of that was autos). The next largest 

Industry 1999 2000 2001 2002 2003

Computers and electronic 

products 11% 13% 13% 13% 13%

Semiconductors and other 

electronic components 7 8 7 9 8

Publishing industries N/A 6 6 8 10

Information services and 

data processing services N/A 1 1 1 1

Computer systems design 

and related services 4 4 4 5 5

All industries (total) 13% 13% 12% 13% 14%
Appendix II

U.S. Multinational Companies’ Investment 

and Operations in the Semiconductor and 

Software Industries

Page 56 GAO-06-423 International Trade

was chemicals with 25 percent of R&D expenditures (of which 21 percent 

was pharmaceuticals). 

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

Source: BEA.

Note: These shares represent the percent of total R&D expenditures abroad for each of the selected 

industries. Data for 2003 are preliminary. “N/A” indicates that the data have been suppressed by BEA 

to avoid disclosure of data of individual companies.

Asia-Pacific economies account for a relatively small share of U.S. MNC’s 

R&D expenditures. Except for Japan (7 percent overall and 15 percent in 

information), Singapore (10 percent in computer and electronic products), 

and Malaysia (5 percent in computer and electronic products), these 

countries each accounted for 3 percent or less of MOFA expenditures in 

ICT-related industries (see table 6). China accounts for about 3 percent of 

manufacturing, but details are not available for computers and electronic 

products. India accounts for less than 1 percent of R&D expenditures 

across most industries (note that in the computers and electronic products 

and professional, technical, and scientific industries, where amounts were 

suppressed in 2003 for India, prior years also showed less than 1 percent).

Industry 1999 2000 2001 2002 2003

Computers and electronic 

products 21% 27% 29% 24% 22%

Semiconductors and other 

electronic components 4 4 4 5 5

Publishing industries N/A 2 2 3 3

Information services and 

data processing services N/A 0 0 0 0

Computer systems design 

and related services 2 2 2 2 2

All industries (total) 100% 100% 100% 100% 100%
Appendix II

U.S. Multinational Companies’ Investment 

and Operations in the Semiconductor and 

Software Industries

Page 57 GAO-06-423 International Trade

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

Source: BEA.

Note: Data for 2003 are preliminary. “N/A” indicates that the data have been suppressed by BEA to 

avoid disclosure of data of individual companies.

Country All industries Manufacturing

Computers and 

electronic 

products Information

Professional, 

technical, 

scientific

Australia 2% 2% 0% 0% N/A

China 3 3 N/A N/A 2

Hong Kong 1 1 N/A 0 1

India 0 0 N/A 0 N/A

Indonesia 0 0 0 0 0

Japan 7 7 6 15 2

Korea, Republic of 1 1 2 N/A 1

Malaysia 1 1 5 0 0

New Zealand 0 0 0 0 0

Philippines 0 0 1 0 0

Singapore 2 3 10 1 0

Taiwan 0 0 0 1 0

Thailand 0% 0% 0% 0% 0%
Page 58 GAO-06-423 International Trade

Appendix III

Larger Imports of Information and 

Communication Goods Drive the U.S. 

Advanced Technology Product Deficit ApendxiI

Since 1989, Commerce’s Bureau of the Census (Census) has identified 

products that use leading edge technologies or innovations. Commerce 

classifies these goods as Advanced Technology Products (ATP). Currently, 

Census identifies about 500 of some 22,000 10- digit commodity U.S. 

merchandise trade classification codes as ATP codes because they meet 

the following criteria: (1) the code contains products from 1 of 10 

recognized high technology fields such as electronics (which includes 

semiconductors) and information and communications (which includes 

notebook computers and cell phones), (2) these products represent 

leading-edge technology in that field, and (3) these products constitute a 

significant part of all items in the selected classification code. 

Partly as a consequence of the growing movement of electronics assembly 

to Asia, and China in particular, in 2005, the United States trade deficit with 

China in the ATP information and communications group, $51.5 billion, is 

slightly larger than the overall ATP deficit with China, $48.4 billion, and 

about 25 percent of the overall goods deficit, $203.8 billion, all of which 

have dramatically grown in recent years.1

 Finished products—such as 

notebook computers and cell phones—are the largest U.S. information and 

communication ATP imports from China in 2005. Computer parts and 

accessories are the leading U.S. exports to China in this group. U.S. 

exports, imports, and the trade balance with China in this group are 

depicted in figure 15. This figure shows both the rapid growth in imports of 

these products from China, as well as the rising trade deficit.2

 

1

We present narrow definitions of ATP trade statistics-- “domestic exports” and “imports for 

consumption” because we wish to exclude flows of goods for which the United States is 

simply a transshipment point. Census publishes the broad definition of ATP trade 

statistics—“total exports” and “general imports.” Nonetheless in recent years, both narrow 

and broad ATP trade flows with China display similar patterns. 

2

For more information on the U.S.-China trade and investment relationship, see GAO, China 

Trade: U.S. Exports, Investment and Affiliate Sales Rising, but Export Share Falling,

GAO-06-162 (Washington, D.C.: Dec. 9, 2005).
Appendix III

Larger Imports of Information and 

Communication Goods Drive the U.S. 

Advanced Technology Product Deficit 

Page 59 GAO-06-423 International Trade

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

In contrast, in the ATP electronics group, beginning in 2001, the United 

States has a trade surplus with China, largely due to the substantial exports 

of semiconductor wafers and integrated circuits to China. (See fig. 16.) 

However, this surplus of about $1 billion in 2003 has been declining 

somewhat in recent years. This current trade surplus is partly a result of 

slower growing U.S. demand for finished integrated circuits by 

downstream manufacturers of consumer electronics, as discussed 

previously. 

-60

-40

-20

0

20

40

60

1989

1990

19911992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Dollars in billions

Imports

Exports

Trade balance

Year

Source: GAO analysis of Census data.
Appendix III

Larger Imports of Information and 

Communication Goods Drive the U.S. 

Advanced Technology Product Deficit 

Page 60 GAO-06-423 International Trade

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

The overall ATP trade deficit with China (as well as Asia overall) is largely 

due to information and communications imports. However, trade statistics 

rarely separate out the value of imported components embodied in finished 

products. Therefore, some part of the value of U.S. imports of information 

and communications products from China is attributable to U.S. exports of 

chips and wafers (and other ATP components) directly to China or 

indirectly through other Asian countries. However, to be a leading-edge 

product, Census must judge the product itself to use leading-edge 

technology, not simply some of its components. For example, although 

autos have many leading-edge components such as semiconductors and 

integrated circuits, autos are not leading-edge products.

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1989

1990

19911992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Dollars in millions

Imports

Exports

Trade balance

Year

Source: GAO analysis of Census data.
Page 61 GAO-06-423 International Trade

Appendix IV

Comments from the Department of 

Commerce ApendxiIV
Page 62 GAO-06-423 International Trade

Appendix V

GAO Contact and Staff Acknowledgments ApendxiV

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

Staff 

Acknowledgments

In addition to the individual named above, Virginia Hughes, Assistant 

Director; Bradley Hunt; Ernie Jackson; Sona Kalapura; Judith Knepper, 

Analyst-in-Charge; Lynn Cothern; Yesook Merrill; Berel Spivack; and Tim 

Wedding made major contributions to this report.
Page 63 GAO-06-423 International Trade

Related GAO Products

Offshoring Offshoring in Six Human Services Programs: Offshoring Occurs in Most 

States, Primarily in Customer Service and Software Development. GAO06-342. Washington, D.C.: Mar. 28, 2006.

Offshoring of Services: An Overview of the Issues. GAO-06-5. Washington, 

D.C.: Nov. 28, 2005.

International Trade: U.S. and India Data on Offshoring Show 

Significant Differences. GAO-06-116. Washington, D.C.: Oct. 27, 2005.

International Trade: Current Government Data Provide Limited Insight 

into Offshoring of Services. GAO-04-932.Washington, D.C.: Sept. 22, 2004.

Highlights of a GAO Forum: Workforce Challenges and Opportunities For 

21st Century: Changing Labor Force Dynamics and the Role of 

Government Polices. GAO-04-845SP. Washington, D.C.: June 1, 2004.

China China Trade: U.S. Exports, Investment, Affiliate Sales Rising, but Export 

Share Falling. GAO-06-162. Washington, D.C.: Dec. 9, 2005.

U.S.-China Trade: Opportunities to Improve U.S. Government Efforts to 

Ensure Open and Fair Markets., GAO-05-554T. Washington, D.C.: Apr. 14, 

2005.

U.S.-China Trade: Observations on Ensuring China’s Compliance with 

World Trade Organization Commitments. GAO-05-295T. Washington, 

D.C.: Feb. 4, 2005.

U.S.-China Trade: Opportunities to Improve U.S. Government Efforts to 

Ensure China's Compliance with World Trade Organization 

Commitments. GAO-05-53. Washington, D.C.: Oct. 6, 2004.

World Trade Organization: U.S. Companies’ Views on China’s 

Implementation of Its Commitments. GAO-04-508. Washington, D.C.: Mar. 

24, 2004.
Related GAO Products

Page 64 GAO-06-423 International Trade

Export Controls: Rapid Advances in China’s Semiconductor Industry 

Underscore Need for Fundamental U.S. Policy Review. GAO-02-

620. Washington, D.C.: Apr. 19, 2002.

Semiconductors Export Controls: System for Controlling Exports of High Performance 

Computing Is Ineffective. GAO-01-10. Washington, D.C.: Dec. 18, 2000.

Federal Research: SEMATECH’s Technological Progress and Proposed 

R&D Program. RCED-92-223BR. Washington, D.C.: July 16, 1992.

Federal Research: SEMATECH’s Efforts to Strengthen the U.S. 

Semiconductor Industry. RCED-90-236. Washington, D.C.: Sept. 13, 1990.

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