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UC Berkeley Press Release

Offshoring won't bring economic doom to United States, researchers say

– Technological innovation - even if it takes place in emerging markets abroad - will not spell economic doom and will likely translate into new jobs and economic growth in the United States, and in Silicon Valley in particular, according to a new study released by two researchers at the University of California, Berkeley's Haas School of Business.

Professor Dwight Jaffee and Ashok Bardhan, a senior economist, both at the Haas School's Fisher Center for Real Estate and Urban Economics, studied research and development activities at 48 technology firms of varying sizes. The results of the study were released last month as a Fisher Center research report, "Innovation, R&D and Offshoring."

Jaffee and Bardhan found that many large U.S. firms (with more than 500 employees) are increasingly sending research and development (R & D) activities to off-shore locations, albeit by setting up affiliated, intra-firm R&D centers abroad. Their research also shows that smaller firms generally conduct their research in the United States - and tend to produce more innovative technologies and ideas.

"After all, in Silicon Valley, the medium through which new innovation has been brought to market has been through the creation of new firms," the authors write in their report.

The report says that these new, "drastic" innovations need incubation and development close to the "cutting-edge" market with the greatest potential for appropriation of the economic returns to innovation.

At the same time, the authors found that the U.S. market could benefit from the geographical dispersion of innovation and research to India, China and other transitioning countries. "Even if India and China take a larger slice of the pie," states the report, "there is the distinct possibility of the pie itself growing faster than before" and therefore allowing the U.S. and other countries to gain from it.

This report is part of an ongoing study of globalization in the high-tech sectors that is being conducted at the Fisher Center for Real Estate and Urban Economics. In a previous report, "A New Wave of Outsourcing" (October 2003), Bardhan and Fisher Center Senior Economist Cynthia Kroll announced that as many as 14 million jobs in the United States were vulnerable to being outsourced in the second wave of off-shoring service jobs (the first wave being manufacturing jobs).

Bardhan, Jaffee and Kroll also wrote a book, "Globalization and a High-Tech Economy: California, the U.S. and Beyond," (December 2003, Kluwer), that analyzed the impacts of the globalization of high technology on job opportunities, wage distribution, community resources, regional growth patterns, the prospects for new business development, and the very structure of these businesses.

"While the potential impact of off-shoring on jobs is still a matter of debate," says Bardhan, "there's general consensus that continued innovation is the primary way to create new, high-paying jobs in the U.S."

Bardhan and Jaffee conclude that education is a critical factor in the United States's ability to continue to drive innovation. Equally important is the ability to develop and maintain the infrastructure of innovation represented by Silicon Valley. The authors call for further research into technology agglomerations, for public policy decisions that will encourage the innovative process, and for the promotion of research in technologies that have an economy wide impact due to their intrinsic capacity to affect every sector.

To download the full study, go to http://repositories.cdlib.org/iber/fcreue/reports/1005/

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