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Published on October 20, 2008

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Facts and Myths in the Globalization Debate Duke University – Pratt School of Engineering – www.pratt.duke.edu Globalization is the new reality: To compete, we need to fix the real problems Vivek Wadhwa Executive in Residence, Pratt School of Engineering, Duke University Fellow, Labor and Worklife Program, Harvard Law School Fellow, Social Sciences Research Inst, Duke University Columnist BusinessWeek.com www.GlobalizationResearch.com © 2008 Vivek Wadhwa

Globalization Duke University – Pratt School of Engineering – www.pratt.duke.edu  Globalization is the new reality:  U.S. businesses see tremendous opportunities abroad and will increasingly locate their operations closer to growth markets  They will also outsource research and development jobs to reduce costs and move their research functions closer to their offshore development sites  The long-term impact of this trend is not clear What’s at stake: American standard of living and economic leadership © 2008 Vivek Wadhwa

7 myths in global competitiveness debate Duke University – Pratt School of Engineering – www.pratt.duke.edu  We’re falling behind in graduating engineers (and scientists)  Companies are going where the skills are  More investment in research = more innovation  Strong math and science education are prerequisites for global competitiveness and R&D  Skilled immigrants fuel the economy so we need to expand the numbers of H1-B visas  Young college dropouts are the typical Silicon Valley entrepreneurs  America is the world leader in workforce development © 2008 Vivek Wadhwa

Common arguments Duke University – Pratt School of Engineering – www.pratt.duke.edu  Last year China’s schools graduated more than 600,000 engineers and India’s schools produced 350,000, compared with 70,000 in America -- The U.S. Department of Education  U.S. children rank below international averages on a test in general knowledge in mathematics and science --National Academies  Tech companies going abroad because they can’t find enough computer science applicants in the U.S.…-- Bill Gates and others Do we have our facts straight? © 2008 Vivek Wadhwa

Duke research – part 1 Duke University – Pratt School of Engineering – www.pratt.duke.edu  Engineering graduation rates  Why companies are going offshore  Skills of American engineers vs. Indian/Chinese  Trends in globalization © 2008 Vivek Wadhwa

Engineering graduation rates Duke University – Pratt School of Engineering – www.pratt.duke.edu Country Graduates What’s Included: Only accredited 4-year engineering U.S. 70,000 bachelors degrees “short cycle” engineering degrees, China 600,000 inconsistent definition of quot;engineer,“ CS, IT and technician degrees (motor mechanics, etc) 2 year “diplomas,” CS and IT India 350,000 degrees Problem: We’re not comparing Apples with Apples © 2008 Vivek Wadhwa

Engineering, CS & IT degrees awarded in 2004 Duke University – Pratt School of Engineering – www.pratt.duke.edu 700,000 600,000 Number of subbaccalaureate degrees Number of bachelor degrees 500,000 292,569 Degrees Awarded 400,000 300,000 200,000 84,898 103,000 351,537 100,000 137,437 112,000 0 United States India China* *China data are considered suspect – collection methods and definition of engineers are inconsistent 7 © 2008 Vivek Wadhwa

Questions raised Duke University – Pratt School of Engineering – www.pratt.duke.edu  Are companies going offshore because of a U.S. skills shortage or a deficiency in U.S. workers?  What are the relative strengths and weaknesses of U.S. engineering graduates vs. India/China?  Do companies hire 2- or 3-year degree/diploma holders?  How do U.S. engineering jobs compare with India/China?  Where is this headed? We surveyed 78 division representatives of 58 U.S. based companies involved in engineering outsourcing © 2008 Vivek Wadhwa

Companies are going where the skills are? Duke University – Pratt School of Engineering – www.pratt.duke.edu Is there a shortage of engineers in the U.S.?  Acceptance rates:  47% reported acceptance rates greater than 60%  80% said acceptance rates had increased or stayed constant  Signup bonuses:  88% offered no bonuses or to less than 20% of hires  Time to fill an open position:  80% said engineering jobs were filled within 4 months In other words – No indication of a shortage in U.S. © 2008 Vivek Wadhwa

Where are the shortages? Duke University – Pratt School of Engineering – www.pratt.duke.edu  Where is there an adequate to large supply of well-qualified entry level workers?:  India -- 75%  U.S. -- 59%  China -- 54% No shortages in India, and greater supply in the U.S. than China?? © 2008 Vivek Wadhwa

Skills of Indians/Chinese vs. Americans Duke University – Pratt School of Engineering – www.pratt.duke.edu  Productivity -- 87% said U.S. workers more productive or equal  Quality -- 98% said U.S. locations produced higher or equal quality  Relative advantages:  U.S. -- communication skills, understanding of U.S. industry, business acumen, education/training, proximity to work centers  China -- cost, willingness to work long hours  India -- cost, technical knowledge, English, strong work ethic Americans are ahead in productivity, quality & market knowledge, but Indian and Chinese workers cost less and work harder © 2008 Vivek Wadhwa

Do bachelor degrees even matter? Duke University – Pratt School of Engineering – www.pratt.duke.edu Degree requirements:  44% hired engineers with 2- & 3-year degrees. Additional 17% would hire such applicants if they had additional training or experience Companies will make do with the best talent they can find and train employees as needed © 2008 Vivek Wadhwa

Why are companies going offshore? Duke University – Pratt School of Engineering – www.pratt.duke.edu Salary or Personnel savings 3.83 Overhead savings 3.06 24/7 continuous development cycle 2.97 Access to new markets 2.89 Cultural or geographic proximity to customers 2.86 Tax incentives & host government assistance 2.52 Co-location of design and production facilities 2.32 0 1 2 3 4 5 In your offshoring endeavors, how much of an advantage, if any, has your company gained from the following? (1: No Advantage; 2: Slight Advantage; 3: Moderate Advantage; 4: Strong Advantage; 5: Significant Advantage) In other words, its all about cost and markets -- not the education level of Americans © 2008 Vivek Wadhwa

The trend Duke University – Pratt School of Engineering – www.pratt.duke.edu Where is this headed?  95% said outsourcing will continue and gain momentum  Most said they would send a greater variety of jobs abroad including research and design  Senior execs of India/China divisions of IBM, Microsoft, Oracle, GE, etc. expressed strong satisfaction with local operations and expected their units to increasingly provide R&D for worldwide operations In other words, we’ve got a lot to worry about © 2008 Vivek Wadhwa

More questions Duke University – Pratt School of Engineering – www.pratt.duke.edu  Will the new R&D jobs being outsourced require more advanced degrees?  How does the U.S. compare to India/China in the production of Masters and PhDs?  What has the trend been in degree production? In other words – Where is the U.S. edge? © 2008 Vivek Wadhwa

Bachelor in engineering, CS and IT Duke University – Pratt School of Engineering – www.pratt.duke.edu 600,000 500,000 400,000 Graduates 300,000 200,000 China (MoE) US 100,000 India 0 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Academic Year US China (MoE) India China numbers are suspect – inconsistent data collection, unrelated degrees. India/China numbers were revised slightly based on new data © 2008 Vivek Wadhwa

Masters in engineering, CS and IT Duke University – Pratt School of Engineering – www.pratt.duke.edu 70,000 60,000 50,000 US (Engr/Tech) Graduates 40,000 30,000 20,000 China (Engr/Tech) India (Engr/Tech) 10,000 India (MCA) 0 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Academic Year US (Engr/Tech) China (Engr/Tech) India (Engr/Tech) India (MCA) China numbers are suspect – inconsistent data collection, unrelated degrees. © 2008 Vivek Wadhwa

PhD’s in engineering, CS and IT Duke University – Pratt School of Engineering – www.pratt.duke.edu 10,000 9,000 8,000 US (Engr/Tech) 7,000 6,000 Graduates 5,000 4,000 3,000 China (Engr/Tech) 2,000 1,000 India (Engr/Tech) 0 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Academic Year US (Engr/Tech) China (Engr/Tech) India (Engr/Tech) © 2008 Vivek Wadhwa

U.S. engineering degrees earned by foreign nationals Duke University – Pratt School of Engineering – www.pratt.duke.edu 59.4% Percentage of Degrees Earned by Foreign Nationals 60% 57.8% 55.2% 53.8% 54.0% 50.1% 50% 46.0% 45.6% 45.5% 43.0% 42.1% 42.6% 39.7% 40.6% 40% 30% 20% 10% 7.8% 8.3% 7.5% 7.2% 7.7% 7.8% 7.5% 0% 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-5 Year US Bachelors Degrees US Masters Degrees US Doctoral Degrees Houston, we’ve got another problem © 2008 Vivek Wadhwa

Duke research – part 2 Duke University – Pratt School of Engineering – www.pratt.duke.edu The next wave of globalization Do the numbers tell the complete story? © 2008 Vivek Wadhwa

R&D in India – on-the-ground reality Duke University – Pratt School of Engineering – www.pratt.duke.edu India is the rapidly becoming the next global center of research, design and innovation:  Pharmaceutical  Drug discovery, specialty pharmaceuticals, biologics, high value, bulk manufacturing, advanced intermediate manufacturing  Aerospace  In-flight entertainment, airline seat design, collision control/navigation control systems, fuel inverting controls, first-class cabin design  Consumer Appliances/Semiconductors, etc.  Design of next-generation washing machines, dryers, refrigerators, digital TV, cell phones, automobiles, tractors, locomotive motors India is racing ahead in R&D, despite its weak education system and graduation rates © 2008 Vivek Wadhwa

R&D in China– on-the-ground reality Duke University – Pratt School of Engineering – www.pratt.duke.edu China is using its manufacturing might to build R&D capability  Massive investments in infrastructure  Massive investments in technology parks  Massive amounts of investment capital in key industries  Massive subsidies for R&D  Pressure on multi-nationals to move R&D to China Yet, China is “limping forward” – MNC investment in R&D in China is largely directed at Chinese Market. China excels in imitation – not innovation Lesson: You can’t mandate or buy innovation © 2008 Vivek Wadhwa

Duke research – part 3 Duke University – Pratt School of Engineering – www.pratt.duke.edu Some American advantages:  Immigrants -- “the melting pot”  Entrepreneurship/innovation  Education/university research  Democracy/freedom/legal system  Workforce development © 2008 Vivek Wadhwa

Skilled immigration Duke University – Pratt School of Engineering – www.pratt.duke.edu  Contribution of skilled immigrants to the tech sector  Called 2,054 engineering and tech companies founded from 1995-2005  Was the CEO or CTO a first-generation immigrant? From what country? © 2008 Vivek Wadhwa

Americas New Immigrant Entrepreneurs Duke University – Pratt School of Engineering – www.pratt.duke.edu Tech and engineering companies founded from 1995-2005:  25.3% nationwide had an immigrant as a key founder  52.4% of Silicon Valley startups founded by immigrants  2005 revenue -- $52 billion. Employed 450,000  Indians founded 26% of these -- more than the next 4 groups (from U.K, China, Taiwan and Japan) combined WIPO patents:  25.6% had foreign national authors in 2006. This increased from 7.6% in 1998  16.8% had a Chinese-name and 13.7% had and Indian-name authors in 2006. This increased from11.2% and 9.5% in 1998 © 2008 Vivek Wadhwa

Background of immigrant entrepreneurs Duke University – Pratt School of Engineering – www.pratt.duke.edu  96% of immigrant company founders have bachelors degrees  74%+ have a Masters or PhD  75%+ have degrees in engineering, math, or science-related fields  52% obtained degrees in the U.S. and stayed after graduation  Plus, anecdotal evidence indicates that immigrants who come to the U.S. are risk takers and highly entrepreneurial Higher Education in STEM does provide advantage © 2008 Vivek Wadhwa

U.S. immigration backlog Duke University – Pratt School of Engineering – www.pratt.duke.edu Legal, educated, skilled workers currently waiting for green cards:  500,040 in main employment-based visa categories plus 555,044 family members  259,717 intl. grad students plus 38,096 in practical training (includes postdocs) Permanent resident visas available yearly:  120,120 in the three main employment visa categories (EB-1, EB-2, and EB-3)  Largest numbers in queue from India and China  Max. number of visas per country – 8,400 (7% of pool) Over 1 million skilled immigrants waiting for yearly quota of 120,000 visas – with 8,400 max/country U.S. is headed for a massive reverse brain-drain – Returnees will accelerate the offshoring of R&D © 2008 Vivek Wadhwa

Entrepreneurship Duke University – Pratt School of Engineering – www.pratt.duke.edu  To understand more about American entrepreneurs, we surveyed 652 CEO’s/CTO’s of 502 tech companies Are universities the source of our tech entrepreneurs? © 2008 Vivek Wadhwa

American Tech Entrepreneurs: Young? Duke University – Pratt School of Engineering – www.pratt.duke.edu US Founder Age at the Time of Startup Establishment 0 - 19 1.2% 20 - 29 14.2% Founder Age 30 - 39 37.5% 40 - 49 34.1% 50 - 59 10.5% 60 - 69 2.5% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% Percentage of all Respondents © 2008 Vivek Wadhwa

American Tech Entrepreneurs: College Dropouts? Duke University – Pratt School of Engineering – www.pratt.duke.edu Associates Degree, High School Certification, MD, STEM Fields 46.5% Diploma or Some 3.8% JD, Arts, Economics, Lower, 5.9% College, 3.5% Humanities 1.8% 2.3% and Social Sciences, Other, 2.8% Law, 4.6% Applied 4.2% Sciences*, 9.0% Healthcare, PhD, 5.5% 10.0% Engineering 27.6% Bachelors, 44.0% Masters, Business, Mathematics 31.0% Accounting, 1.5% Finance, Computer 33.4% Science, Information Technology 9.0% Highest Completed Degree Fields of Highest Degree © 2008 Vivek Wadhwa

They start companies right out of college? Duke University – Pratt School of Engineering – www.pratt.duke.edu Average Time Lag Between US Founders' Highest Education and Startup Founding 25.0 Years Between Highest Degree and Startup Founding 20.9 20.0 16.7 14.7 15.0 13.1 10.0 5.0 0.0 MBA Masters Bachelors PhD Highest Degree © 2008 Vivek Wadhwa

Or where they study? Duke University – Pratt School of Engineering – www.pratt.duke.edu Percentage of US Founders who Establish a Startup in the Same State in which they Received a Degree 69.2% 70.0% Percentage of Founders with a Degree and Startup in the Given 58.3% 60.0% 52.4% 52.9% 50.0% 45.0% 45.2% 40.0% 29.0% 29.7% 30.0% 30.0% 28.1% State 21.2% 20.0% 17.9% 15.0% 10.0% 0.0% -10.0% State © 2008 Vivek Wadhwa

Ivy-league education provides BIG advantage? Duke University – Pratt School of Engineering – www.pratt.duke.edu $8 50 $7 Average 2005 Sales (Millions of USD) Average 2005 Total Employees $6 40 $5 30 $4 $3 20 $2 10 $1 $0 0 All Startups Startups w/ an Ivy-Leauge Founder Startups w/ a High School Founder Average 2005 Sales Average 2005 Employment What makes the difference is higher education: not the degree or school. The place where the most entrepreneurs originate is the workforce © 2008 Vivek Wadhwa

University research Duke University – Pratt School of Engineering – www.pratt.duke.edu $45 billion invested every year in U.S. university research with very few spinoffs and less than $2 billion in license revenue. European university investment is much lower than the U.S., but generates 3 times as many startups… but generates far fewer patents Common Problems – U.S. and Europe:  Incomplete system -- legal and finance in place, but corporate development, marketing, and sales are missing  Cultural issues -- academics want to disseminate knowledge and publish papers rather than inhibit it’s use. What comes first -- students or commercialization? What about the conflicts of interest?  University technology is half-baked -- proof of concept not funded Untapped goldmine of knowledge and innovation © 2008 Vivek Wadhwa

Duke research – Part 4 Duke University – Pratt School of Engineering – www.pratt.duke.edu Workforce development: the secret of India’s success © 2008 Vivek Wadhwa

India’s challenge and achievement Duke University – Pratt School of Engineering – www.pratt.duke.edu  50% of engineering graduates are not employable  Famed IIT’s graduate less than 5000 engineers  Country has weak infrastructure and weak education system Yet:  Tip of the iceberg: In 2007, top 5 IT companies hired 120,000 engineers. Accenture and IBM India added 14,000 each.  India is racing ahead in becoming a global R&D hub How? India has adopted the best practices of its Guru (the U.S.) and perfected these © 2008 Vivek Wadhwa

Workforce development in India -1 Duke University – Pratt School of Engineering – www.pratt.duke.edu  Workforce Recruitment  Résumés don’t reflect potential and degrees are not a proxy for skill and competency. Hiring is based on ability and competence  “Bulk” hiring from universities  Open door interviews/storefronts  Lower–tier schools, non-metro areas, women, retirees, ex-servicemen, older workers, disadvantaged groups  New Employee Training  “Army boot camp” like training for new recruits in technical as well as soft-skills  2-7 month training programs for “freshers”  Infosys’ new center can train 13,500. TCS aiming for 30,000 at a time  Complemented by extensive mentoring and on-the-job training © 2008 Vivek Wadhwa

Workforce development in India -2 Duke University – Pratt School of Engineering – www.pratt.duke.edu  Ongoing Skill Development  40-150 hours mandatory formal training every year for every employee  Supplemented by extensive mentoring/informal training  Extensive online training programs which employee are rewarded for completing  “Leaders as Teachers” – senior executives deliver training. Cadence requires every manager to spend 1-2 weeks a year. Satyam mandates 30 hrs.  “Communities of learning”, seminars, expert talks, online technical forums  Managerial development – 3 years from “fresher” to manager  Extensive managerial development programs usually in conjunction with leading business schools.  Career progression planned and predictable  Senior Management invests significant time in coaching/mentoring  Promotion from within policies © 2008 Vivek Wadhwa

Workforce development in India - 3 Duke University – Pratt School of Engineering – www.pratt.duke.edu  Performance management/appraisal  ERP-like systems manage employee development through their careers  Sophisticated, frequent review processes like 360 degree feedback  Tied to training, salary and career progression  HCL has “Employee first, customers second” program to empower employees  Employees often appraise managers and senior leaders; results available on line  Upgrading education  Training academics, funding curriculum development  Leading companies have helped develop customized degree programs  Strong university to industry linkages © 2008 Vivek Wadhwa

Conclusions Duke University – Pratt School of Engineering – www.pratt.duke.edu  Learn from the former disciple: focus on moving workforce up the ladder rather than graduating more  Bring and keep the worlds best and brightest  Make our investments in research more effective  Foster entrepreneurship at its source – the workforce  Understand globalization and create new business models which leverage innovation abroad  Compete on American strengths -- In other words, let’s do what we do better © 2008 Vivek Wadhwa

Duke University – Pratt School of Engineering – www.pratt.duke.edu More information at: www.GlobalizationResearch.com © 2008 Vivek Wadhwa

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