No race to the bottom

The declining importance of cheap labor in the high-tech economy.

By Andrew Leonard
Published February 16, 2006 6:27PM (EST)

A new study released today on why U.S. and European corporations are offshoring their research and development efforts is trumpeting a supposedly new insight: In contrast to the assumptions embedded in long-standing media coverage, say researchers Marie and Jerry Thursby, cost is not the preeminent consideration encouraging multinationals to set up R & D labs in China or India. Factors such as proximity to universities and local markets, and access to top scientists and engineers, play equally important roles.

In other words, as outsourcing moves up the value chain, the migration of jobs isn't simply a matter of seeking the cheapest labor available. Strategic decisions are critical. For a high-tech multinational looking to sell into the Chinese domestic market, for example, it makes complete sense to aggressively ramp up operations at the highest level in China's most advanced regions.

But this isn't breaking news. Take, for instance, the semiconductor industry. It is well established that labor costs are an insignificant factor in determining where to break ground on a new semiconductor manufacturing facility. Far more important are tax incentives, breaks on real estate, and arcane accounting rules on such things as capital goods depreciation allowances. (The cost of installed machinery in a semiconductor plant is so great that the issue of how depreciation is handled is a major consideration for the bottom line.)

So what does this mean? One of the authors of the report is quoted in the New York Times as saying, "You have to have an environment that fosters the development of a high-quality work force and productive collaboration between corporations and universities if America wants to maintain a competitive advantage in research and development."

Let's put aside the problem that in some ways, industry and academia are already a little too close for comfort in the United States. The larger issue is the question of strategy: How are such "environments" created and nurtured? As the global economy matures, governmental priorities -- education, funding for research, infrastructural support for high-tech industries -- will play a significant role in determining the flow of investment and the location of jobs. It's not a race to the bottom -- it's a race to the best deal. And if you think that's a call for a more aggressive industrial policy, then you win a prize.

Bush's State of the Union pledge to boost spending on R & D and education has been applauded by Silicon Valley high-tech executives as a step in the right direction, but in the overall context of what's necessary for ensuring true competitiveness, his promises are (in the unlikely event that they actually make it through the budgetary process) irrelevant.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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