GAO-04-932, International Trade: Current Government Data Provide Limited Insight into Offshoring of Services

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Report to Congressional Requesters:

September 2004:

INTERNATIONAL TRADE:

Current Government Data Provide Limited Insight into Offshoring of
Services:

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-932]

GAO Highlights:

Highlights of GAO-04-932, a report to congressional requesters

Why GAO Did This Study:

Much attention has focused on the topic of “offshoring” of information
technology (IT) and other services to lower-wage locations abroad.
“Offshoring” of services generally refers to an organization’s purchase
from other countries of services that it previously produced or
purchased domestically, such as software programming or telephone call
centers. GAO was asked to (1) describe the nature of offshoring
activities and the factors that encourage offshoring, (2) discuss what
U.S. government data show about the extent of this practice by the
private sector and federal and state governments, and (3) discuss
available data on the potential effects of services offshoring on the
U.S. economy.

What GAO Found:

No commonly accepted definition of “offshoring” exists, and the term
has been used to include various international trade and foreign
investment activities. Services that U.S.-based organizations purchase
from abroad are considered imports. They may also be linked to U.S.
firms’ investments overseas—for example, U.S. firms may invest in
overseas affiliates as a replacement for, or as an alternative to,
domestic production. In recent years, services offshoring has been
facilitated by factors, such as the Internet, infrastructure growth in
developing countries, and decreasing data transmission costs.
Organizations’ decisions to offshore services are influenced by
potential benefits such as the availability of cheaper skilled labor
and access to foreign markets, and by risks, such as geopolitical
issues and infrastructure instability in countries that supply the
services.

U.S. government data provide some insight into the extent of services
offshoring by the private sector, but they do not provide a complete
picture of the business transactions that the term offshoring can
encompass. Department of Commerce data show that private sector
imports of some services are growing. For example, imports of business,
professional, and technical services increased by 76.8 percent from
$21.2 billion in 1997 to $37.5 billion in 2002. From another
perspective, Commerce’s data also show that in 2002 U.S. investments
in developing countries that supply offshore services were small
compared to those in developed countries and that most services
produced abroad are sold primarily to non-U.S. markets. Regarding
public sector offshoring, the total dollar value of the federal
government’s offshore services contracts increased from 1999 through
2003, but the trend in the dollar value shows little change relative
to all federal services contracts. No comprehensive data or studies
show the extent of services offshoring by state governments.

Government data provide limited information about the effects of
services offshoring on U.S. employment levels and the U.S. economy.
The Department of Labor’s Mass Layoff Survey data show that layoffs
attributable to overseas relocation represent a small fraction of
overall total mass layoffs. However, the survey identifies only a
portion of total layoffs because the survey does not cover
establishments with fewer than 50 employees. Other government data
show greater than average job declines since 2001 in occupations and
industries commonly associated with offshoring, but other factors,
such as the recent recession, may contribute to these declines. Some
private researchers predict that offshoring may eliminate 100,000 to
500,000 IT jobs within the next few years, while others note that
offshoring can also generate benefits, such as lower prices,
productivity improvements, and overall economic growth.

The Department of Commerce commented on a draft of this report, noting
its general agreement with the information we provided.

GAO Observations:

While we make no recommendations at this time, we observe that the
reasons for the growth in offshoring are relatively well understood,
but less is known about the extent and the policy consequences of this
activity. To assess changes which occur in a dynamic economy, federal
statisticians and other researchers use and sometimes modify existing
data series and develop new measures to provide further insight into
the extent of the phenomena as well as the longer-term implications.
GAO will continue to monitor the statistics and other dimensions of
offshoring in order to provide Congress with information it needs in
its policy deliberations.

www.gao.gov/cgi-bin/getrpt?GAO-04-932.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Loren Yager at (202) 512-
4347 or yagerl@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

"Offshoring" of IT and Other Services Includes Several Types of
Business Activities and Is Facilitated by Telecommunications
Improvements:

Federal Statistics Provide Limited Insight into Offshoring Trends:

Federal Statistics and Private Sector Research Provide Limited
Information about the Effects of Offshoring on the U.S. Workforce and
the Broader Economy:

Observations:

Agency Comments and Our Evaluation:

Appendixes:

Appendix I: Scope and Methodology:

Appendix II: Definitions of Offshoring:

Appendix III: Data on U.S. Imports and Exports of Services and Their
Limitations:

Appendix IV: Data on U.S. Direct Investment Abroad, Multinational
Company Operations, and their Limitations:

Appendix V: Comments from the Department of Commerce:

Appendix VI: GAO Contacts and Staff Acknowledgments:

GAO Contact:

Staff Acknowledgments:

Tables:

Table 1: Examples of Offshoring Business Activities and Potential Data
Sources:

Table 2: Selected Destinations for U.S. Foreign Direct Investment (FDI)
Abroad: Total by Country, 2002; Share of Total FDI, 2002; and
Percentage Change from 1999:

Table 3: Employment in U.S. Multinational Companies in the United
States and Abroad, 2001:

Table 4: Change in Employment of Total Nonfarm and Selected Industries,
Quarterly Averages, 2001-2004:

Table 5: Average Hourly Wages and Employment Levels for Occupational
Categories Associated with Offshoring, 2002:

Table 6: Percentage Employment Change in Selected Occupations, 2001-
2002:

Table 7: Private Sector Estimates of Offshoring and Its Potential
Effects:

Table 8: Unaffiliated Business, Professional, and Technical (BPT)
Services Exports and Imports by Selected Country, 2002:

Table 9: Share of Total Unaffiliated Business, Professional, and
Technical (BPT) Services Exports and Imports by Selected Country, 2002:

Table 10: U.S. Foreign Direct Investment (FDI) Abroad, 2002; Share by
Country, 2002; Change from 1999; and Share by Industry, 2002:

Table 11: Value and Share of Intermediate Purchases (Outsourcing) in
U.S. Multinational Companies' U.S.-based Operations, 1999-2001:

Figures:

Figure 1: U.S. Private Sector Gross Domestic Product, 2002:

Figure 2: Share of Services in U.S. Imports and Exports, 2002:

Figure 3: Worldwide Commercial Services Importers, 2002:

Figure 4: Total Private Services and Other Private Services, 2002:

Figure 5: Growth in Unaffiliated U.S. Imports of Selected Components of
Business, Professional, and Technical Services, 1992-2002:

Figure 6: U.S. Unaffiliated Imports and Exports of Business,
Professional, and Technical Services, by Country of Origin, 2002:

Figure 7: U.S. Unaffiliated Imports from India of Selected Business,
Professional, and Technical Services:

Figure 8: Total U.S. Services Trade and Unaffiliated Business,
Professional, and Technical Services Trade, 1992-2002:

Figure 9: Share of U.S. Majority-Owned Nonbank Foreign Affiliate's
Total Sales of Services Exported to the United States, 2001:

Figure 10: Change in Dollar Value of the Federal Government's
Procurement of IT and Other Services by Performance Location between
Fiscal Years 1999-2003:

Figure 11: Annual Average Percentage Change in Private Sector
Employment in Selected Industries, from March 2001-June 2004:

Figure 12: Change in Private Sector Employment in Selected IT-Related
Industries, Annual Averages, 1990-2001:

Figure 13: Offshoring Activities, Related Data Sources, and Employment
Impacts:

Figure 14: Offshoring versus Outsourcing: a Company's Sourcing Options:

Abbreviations:

BEA: Bureau of Economic Analysis:

BED: Business Employment Dynamics:

BLS: Bureau of Labor Statistics:

BPT: business, professional, and technical:

CES: Current Employment Statistics:

FDI: foreign direct investment:

FPDS: Federal Procurement Data System:

GAO: Government Accountability Office:

GDP: gross domestic product:

GSA: General Services Administration:

IT: information technology:

ITA: International Transactions Accounts:

MLS: Mass Layoff Survey:

MNC: multinational company:

NAICS: North: American Industry Classification System:

OES: Occupational Employment Statistics:

OMB: Office of Management and Budget:

OPEC: Organization of the Petroleum Exporting Countries:

QCEW: Quarterly Census of Employment and Wages:

SIC: Standard Industrial Classification:

USTR: Office of the U.S. Trade Representative:

Letter September 22, 2004:

The Honorable Ike Skelton:
Ranking Minority Member:
Committee on Armed Services:
House of Representatives:

The Honorable John D. Dingell:
Ranking Minority Member:
Committee on Energy and Commerce:
House of Representatives:

The Honorable Tammy Baldwin:
House of Representatives:

The Honorable Jay Inslee:
House of Representatives:

The Honorable Adam Smith:
House of Representatives:

Although attention has long focused on offshoring in the manufacturing
sector of the U.S. economy, more recently concerns have been raised
about the nature and extent of offshoring in the services sector and
its effects on the U.S. workforce. Offshoring generally refers to the
practice, by either U.S. companies or government entities, of replacing
services produced domestically with imported services. Advances in
information technology (IT) and communications, coupled with a large
pool of educated workers in some developing countries, allow
organizations to move services jobs overseas as part of a larger trend
towards globalization. Organizations move services jobs, such as those
involved in software programming or telephone call centers, to lower-
wage locations, such as India, the Philippines, and Eastern Europe.
Offshoring causes controversy because some jobs are lost immediately
and visibly, while other potential impacts such as lower costs, job
creation in other sectors, and economic growth are less visible, more
diffuse, and typically delayed.

You requested that we examine the available data to provide more
information about the offshoring of information technology and other
services. As agreed with your staffs, we (1) describe offshoring
activities and describe factors that encourage offshoring, (2) discuss
what U.S. government data show about the extent of this practice by the
private sector and federal and state governments, and (3) discuss what
the data show about the effects of offshoring IT and other services on
the U.S. economy.

To do so, we analyzed available U.S. government data and private sector
studies on international trade-in-services and foreign investment. We
also interviewed government officials familiar with the trade-in-
services and employment data that provide the bases for most analyses
of offshoring. We also met with private sector experts who have
published analyses of services offshoring. We assessed the reliability
of the federal government data discussed in this report and found it to
be sufficiently reliable for the purposes of this report. We also
provide information from private sector studies on offshoring and
discuss the limitations of these studies. However, we did not assess
the overall reliability of these studies. We conducted our analysis in
accordance with generally accepted government auditing standards from
January to August 2004. A detailed description of our scope and
methodology appears in appendix I. This report is one of a series of
reports that GAO plans to issue on offshoring.

Results in Brief:

"Offshoring" of services generally refers to an organization's
purchases from abroad (imports) of services that it previously produced
in-house or purchased from another domestic source. Examples of such
services include software programming and design, call center
operations, accounting and payroll operations, medical records
transcription, paralegal services, and software research and testing.
The term offshoring has also been used in the public debate to include
several other types of international trade and foreign investment
activities, and no commonly accepted definition of offshoring exists.
For example, U.S.-based firms may expand by investing in affiliates
overseas rather than expanding their domestic operations, thus creating
new jobs overseas while maintaining U.S. job levels. These activities
may also affect profits, prices, and other economic factors in
different ways. Information technology improvements, infrastructure
growth in developing countries, and decreasing data transmission costs
facilitate the increased use of offshoring. Organizations choose
offshoring to gain such benefits as the use of cheaper, skilled labor
and access to foreign markets. Nevertheless, offshoring also introduces
risks, such as geopolitical concerns and cultural differences, which
influence decisions on whether or not to offshore certain business
functions.

U.S. government data provide some insight into the trends in offshoring
of services by the private sector, but they do not provide a complete
picture of the business transactions that the term offshoring can
encompass. In particular, they do not identify U.S. imports of services
previously produced by U.S. employees. The Department of Commerce's
trade data show that imports of services associated with offshoring are
growing. For example, U.S. imports of services associated with
offshoring--business, professional, and technical (BPT) services--grew
from $21.2 billion in 1997 to about $37.5 billion in 2002, an increase
of 76.9 percent. During the same period, U.S. exports of BPT services
increased 48.6 percent, with the United States maintaining a trade
surplus in this category. Another approach to analyzing offshoring is
to assess the extent to which U.S. companies have invested in foreign
countries and are exporting services back to the United States.
Commerce's data on direct investment abroad show that, as of 2002, U.S.
investments in developing countries that supply offshore services
(e.g., India and the Philippines) were relatively small--about 4
percent or less, for each country, of total U.S. direct investments
abroad. These investments were primarily concentrated in the
manufacturing sector. In addition, most services produced abroad by
U.S. majority-owned foreign affiliates are sold to foreign markets
rather than to the United States. Regarding public sector offshoring,
the total dollar value of the federal government's services contracts
with offshore performance or manufacturing locations has increased over
the past 5 years; however, relative to all federal contracts for
services, the trend in the dollar value of offshoring shows little
change. In addition, although there are anecdotal accounts of state
governments using offshore sources, no comprehensive data or studies of
the extent to which state governments use these sources are available.

Federal statistics provide limited information about the effects of
offshoring IT and other services on the U.S. labor force and the
economy overall. The Department of Labor's Mass Layoff Survey (MLS)
shows that layoffs attributable to overseas relocation have increased
since 1999, but these layoffs represent a small fraction of workers
laid off--of 1.5 million layoffs reported in the 2003 MLS, 13,000 (0.9
percent) were reportedly due to overseas relocation. The data also show
that most of these layoffs were in the manufacturing sector. However,
the survey identifies only a portion of total layoffs, because it
covers relatively large establishments (50 or more employees) and
relatively large layoffs (at least 50 in a 5-week period). Occupational
Employment Statistics and Current Employment Statistics data series
indicate that occupations and industries commonly associated with
offshoring have experienced greater than average job declines since
2001. However, the reasons for these declines cannot be specifically
linked to offshoring because other factors, such as the collapse of the
dot.com bubble, likely contributed to those job declines. Some private
researchers have estimated the effects of offshoring on employment and
other economic activity. For example, some predict that offshoring may
eliminate 100,000 to 500,000 IT jobs within the next few years.
However, some also predict economic benefits from offshoring, including
lower prices, productivity improvements, job creation in sectors using
offshored services, and overall higher growth for the U.S. economy.

Although we make no recommendations at this time, we observe that the
reasons for the growth in offshoring are relatively well understood,
but less is known about the extent and the policy implications of this
activity. Discussion of this issue is similar in many ways to
discussions of other changes that occur in a dynamic economy. In these
cases, federal statisticians and other researchers attempt to use and
modify existing series and develop new measures to provide insight into
the phenomena. As more recent data are collected and additional studies
are completed, some questions about the extent of offshoring will be
addressed. Policymakers, analysts, and others inside and outside the
government combine those statistics with theory and models of the
economy to define the indirect and longer-term implications of the
particular changes that are of policy interest. To some extent, the
policy decisions are dependent upon the results of the ongoing research
on the extent of the activity and a better understanding of the
indirect effects of this activity on the U.S. workforce and the
economy.

Background:

Services purchased from foreigners are considered U.S. imports: a U.S.
import occurs when a U.S.-based company pays for a service produced
abroad and supplied to the United States (either to the company or
directly to its customers, as in the case of the call center). Although
the service (e.g., a computer program, a database, or a telephone call)
may be supplied digitally through telecommunication lines, rather than
physically crossing the border like a good (e.g., an automobile
import), it still is supplied by a foreign-based producer and paid for
by a U.S.-based importer.

Most U.S. domestic output consists of services. In 2002, services-
producing industries accounted for about 78 percent of the U.S. private
sector economy (when measured in terms of gross domestic product)
compared to 22 percent for goods-producing industries.[Footnote 1]
(See fig. 1.) Similarly, U.S. private sector employment is concentrated
in service-producing industries (79 percent) compared to goods-
producing industries (21 percent). However, it is important to note
that goods-producing industries may also employ workers in "services"
occupations (e.g., computer programmers or accountants).

Figure 1: U.S. Private Sector Gross Domestic Product, 2002:

[See PDF for image]

Note: The Commerce data are taken from the Bureau of Economic
Analysis's Survey of Current Business, June 2004, p. 35.

[End of figure]

Services are a relatively small share of U.S. imports, compared with
their share of the U.S. economy. Services make up about 16 percent of
total U.S. imports, compared with 84 percent of imports covered by
goods. (See fig. 2.) Services make up a greater share of U.S. exports
but still account for only 30 percent of the total. Services trade may
be relatively small relative to the size of services output in the U.S.
economy partly because some services (e.g., haircuts, housing, and
hospitals) are difficult or impossible to trade internationally.
Overall, U.S. imports of services accounted for only about 3 percent of
U.S. consumption of services in 2002.[Footnote 2]

Figure 2: Share of Services in U.S. Imports and Exports, 2002:

[See PDF for image]

[End of figure]

According to the World Trade Organization, the United States is the
world's largest importer of commercial services, with 13.3 percent of
the world's share. (See fig. 3.) The United States is the world's
largest exporter of commercial services, as well. Overall the United
States exports more services than it imports and therefore maintains a
surplus in services trade.

Figure 3: Worldwide Commercial Services Importers, 2002:

[See PDF for image]

Note: The World Trade Organization defines commercial services as
services (as used by the Bureau of Economic Analysis) less government
services.

[End of figure]

"Offshoring" of IT and Other Services Includes Several Types of
Business Activities and Is Facilitated by Telecommunications
Improvements:

The term "offshoring" generally refers to an organization replacing
services produced domestically with imported services. However, no
commonly accepted definition for offshoring exists, and the term has
been used in public debate to include several other types of business
activities. Services offshoring has been facilitated by improvements in
information technology, decreasing data transmission costs, and
expanded infrastructure in developing countries. Organizations may
choose to move some business functions, such as accounting and payroll
operations, offshore to gain certain benefits, such as lower labor
costs and access to skilled workers. Nevertheless, organizations also
face risks, which influence their decisions whether or not to offshore
certain business functions. Business functions that are offshored tend
to share some common characteristics related to job content and
customer focus. Based on BLS data and other sources, some analysts have
also identified occupations that appear to be vulnerable to being
offshored.

Offshoring Covers a Range of Activities:

U.S. organizations, such as private firms or governments, may decide to
import certain services from offshore that they had previously obtained
domestically (whether through their own production or from another
domestic firm). This is commonly called offshoring. However, no
standard definition of offshoring exists, and the term has been used
broadly to discuss a range of business activities related to
international trade and foreign investment. In addition, definitions of
offshoring frequently define it as imports or investment that result in
the displacement of U.S. production and employment.

In table 1 we present several types of business and government
activities associated with offshoring. We also indicate the potential
data sources for each type of activity that we discuss later in this
report. The first two activities in the table are widely associated
with offshoring. The third, fourth, and fifth examples show more
complex business activity, which may involve aspects of
offshoring.[Footnote 3] The sixth example involves government
offshoring activities. Definitions of offshoring and related business
activities are discussed in more detail in appendix II.

Table 1: Examples of Offshoring Business Activities and Potential Data
Sources:

Business activity: 1. A U.S.-based company stops producing its
accounting, payroll, and call center services in-house and instead
purchases them from a foreign-based company;
Potential data sources:
* Import statistics capture the U.S. company's payment for the
offshored services;
* Employment statistics capture the number of U.S. employees who were
displaced.

Business activity: 2. A U.S.-based company moves its accounting,
payroll, and call center services from its domestic operations to a
new foreign-based affiliate set up to produce these services;
Potential data sources:
* Import statistics capture the U.S. company's payment to its foreign
affiliate for the offshored services;
* Foreign direct investment statistics capture the value of the U.S.
company's investment in the affiliate, as well as operational
information on employment and sales of the affiliate;
* Employment statistics capture the number of U.S. employees who were
displaced;
* Multinational company data capture repatriated profits and income
from the affiliate and exports from the U.S.-based company to its
affiliate.

Business activity: 3. A U.S.-based company expands production by
opening a new affiliate overseas, but maintains its existing production
in the United States;
Potential data sources:
* Foreign direct investment statistics capture the value of the U.S.
company's investment in the affiliate, as well as operational
information on employment and sales of the affiliate;
* Since the company maintains its current production, import and
employment statistics will not capture any changes due to the new
production overseas, nor will they capture the production and
employment that might have occurred if the company expanded
domestically rather than offshore;
* Multinational company data capture repatriated profits and income
from the affiliate and exports from the U.S.-based company to its
affiliate.

Business activity: 4. A U.S.-based company that sells domestically and
exports to foreign markets moves its production to an offshore
location;
Potential data sources:
* Export statistics will capture the decline in U.S. exports due to
the U.S. company shifting production;
* Import statistics will capture the increase due to the new imports
provided from offshore for the domestic market;
* Foreign direct investment statistics capture the value of the U.S.
company's investment in the affiliate, as well as operational
information on employment and sales of the affiliate;
* Employment statistics capture the number of U.S. employees who were
displaced;
* Multinational company data capture repatriated profits and income
from the affiliate and exports from the U.S.-based company to its
affiliate.

Business activity: 5. A U.S.-based company reorganizes its global
production operations by concentrating its computer programming in a
foreign affiliate in one country, its customer services operations in
a foreign affiliate in another country, and splitting its production
operations between the United States and its foreign affiliate in yet
another country. The final products are produced in both the United
States and abroad and sold globally;
Potential data sources:
* Import statistics capture the U.S. company's payment to its foreign
affiliates for the services that are supplied to the U.S. operations.
However, services supplied between foreign affiliates will not be
captured;
* Foreign direct investment statistics capture the value of the U.S.
company's investment in the affiliates, as well as operational
information on employment and sales of the affiliates;
* Employment statistics capture both the number of U.S. employees who
were displaced from production that the company moved abroad, as well
as the number of new U.S. employees that result from expanded
production in the United States;
* Multinational company data capture repatriated profits and income
from the affiliate and exports from the U.S.-based company to its
affiliate.

Business activity: 6. A state government agency contracts out its
software programming for a particular program to a foreign-based
company;
Potential data sources:
* Import statistics capture the state's payment for the offshored
services;
* State level procurement data, if collected, would capture the value
of the contract;
* Employment statistics capture the number of U.S. employees who were
displaced, if the state agency eliminated some positions with the
contract.

Source: GAO.

Note: Import, investment, and employment data are discussed later in
this report. Other broad economic statistics may capture the effects of
offshoring. These are also discussed below.

[End of table]

All the activities listed in table 1 also have the potential to impact
a variety of economic measures. These impacts are typically identified
through economic modeling and not through direct data reporting. This
is because either the impacts are difficult to capture directly or
because they are one of many impacts on broad, aggregate measures of
economic activity. These measures can include, but are not limited to,
consumer and producer prices, productivity, profits, job creation, and
economic growth.

Information Technology Advances and Business Benefits Encourage
Offshoring:

Offshoring of services has been encouraged by information technology
(IT) improvements and expected business benefits. In particular, recent
developments in the telecommunications industry, such as technology
improvements, infrastructure growth in developing countries, and
decreasing data transmission costs, have facilitated the use of
offshoring. First, according to several studies, improvements in
telecommunications capabilities, such as advances in routing and
switching technologies that enable the distribution of voice and data
services, have increased the reliability and service quality of global
voice, data, and Internet communications.[Footnote 4] Second, the
growth of the global telecommunications infrastructure has provided
developing countries cost-effective infrastructure options, such as
wired landline and satellite communication services to communicate
across national borders. Third, global data traffic has substantially
increased since the early 1990s, while the cost of transporting data
has declined, thereby making the offshoring of services that rely on
the transmission of data more cost effective.[Footnote 5]

Other IT advances, such as greater standardization of business
applications and network protocols,[Footnote 6] have increased system
interoperability and thus further facilitated offshore sourcing. Among
others, universal computing standards and protocols, such as the
Transmission Control Protocol/Internet Protocol, have enabled
businesses to communicate worldwide through the use of e-mail and
collaborative tools, such as video conferencing, instant messaging, and
shared whiteboard technologies. Additionally, the worldwide use of the
personal computer in conjunction with the global availability of the
Internet have enabled organizations to digitally share and transmit
documents over private networks using encryption applications for added
security. According to a technology research firm's forecast, the use
of private networks will continue to increase due to widely available
network-based solutions that support increased access options,
security, and new applications.[Footnote 7]

In addition to technological factors that allow services to be
conducted offshore, an organization may choose this option because it
expects to realize various benefits. According to several business
studies, the primary reason organizations engage in offshore sourcing
is to reduce costs.[Footnote 8] Specifically, due to competitive
pressures and increasing customer demand for innovative products,
businesses are using offshoring as a way to reduce their internal costs
structures, such as sales, general, and administrative costs. The labor
cost differential between the United States and developing nations can
be significant. According to a technology research firm, organizations
that offshore accounting and customer service to China can potentially
save 30 to 50 percent in labor costs compared to keeping those
processes in Tokyo, London, or Chicago.[Footnote 9] Moreover, the
hourly wage rate for programmers in the U.S. can be up to three times
that of programmers in India.[Footnote 10] For example, a leading e-
business software company reportedly was able to achieve 40-45 percent
lower costs per overseas employee compared to hiring equivalent senior
developers in the United States.[Footnote 11]

Other expected benefits of offshoring include access to skilled workers
and providers that use disciplined processes and the facilitation of a
round-the-clock work schedule. For example, according to the National
Association of Software and Service Companies, India's chamber of
commerce for the IT services and software industry, approximately
140,000 students graduated in an IT-related engineering field from
degree and diploma colleges and universities in India during the 2003-
2004 academic year. According to one study, a media and publishing
company incorporated highly skilled overseas senior developers,
architects, and project managers into its Web site development project,
which reportedly led to an accelerated delivery schedule, reduced
costs, and increased customer service.[Footnote 12] In addition, as of
July 14, 2004, of the 74 worldwide organizations that have been
certified at the highest rating in the Capability Maturity Model
Integration model created by the Software Engineering Institute at
Carnegie Mellon University,[Footnote 13] 48 are headquartered outside
the United States.[Footnote 14] This is important because our work and
other best practices research have shown that the application of
rigorous practices to the acquisition or development of IT systems or
the acquisition of IT services improves the likelihood of success.
[Footnote 15] Moreover, offshoring can facilitate operating on a 24-
hour, 7-day schedule across numerous time zones, thereby allowing
companies to meet worldwide customer needs. For example, according to
one study, a financial services unit of a Fortune 50 company has
operations in overseas countries that provide around-the-clock in-
bound and out-bound call centers, accounting services, IT help desks,
document storage, and software implementation.[Footnote 16]

Although offshoring can be beneficial, organizations also face risks
that are relevant to decisions about whether or not to offshore
services. Commonly cited offshore sourcing risks include unrealized
cost savings due to unforeseen expenses, geopolitical concerns,
cultural differences, and infrastructure instability. For example,
organizations that engage in offshoring can incur additional costs in
conducting overseas business operations in order to, for instance,
establish high-speed telecommunications links, acquire new software
licenses, and pay for travel expenses.[Footnote 17] According to one
study, expectations in cost reduction are not always met because
outsourcing contracts can be developed with a poor understanding of
current costs and little insight into how costs will change as the
environment changes.[Footnote 18] In addition, it is important to
consider the destination country's stability, legal system, and
contract enforcement in making offshoring decisions. For example, one
factor in assessing the legal system is whether adequate intellectual
property protections, such as laws and regulations, are in place to
ensure that sensitive company data are protected from unauthorized
disclosure or use. Cultural differences can also pose a potential risk
because business attitudes, including timeliness and punctuality,
country accents, and holiday schedules, may be different than those in
the United States. For example, overseas call center and customer
service employees have reportedly sometimes found it difficult to
establish a rapport with consumers due to a lack of understanding of
language accents. A leading financial services company reportedly
requires its application managers to go through a cultural exchange
program designed to foster a better understanding of domestic and
overseas business norms.[Footnote 19] Lastly, despite public utility
infrastructure improvements, some countries' businesses still face
infrastructure risks, such as the reliance on energy, telephone, and
networks that may be susceptible to intermittent disruptions and
outages. Our prior work indicates the importance of organizations
considering both the benefits and risks associated with sourcing
decisions before adopting any particular approach, such as offshoring,
into their business strategies and plans.[Footnote 20]

Services Offshoring Affects Various Types of Business Functions and
Occupations:

Business functions and service occupations associated with offshoring,
combined with other distinguishing process features, provide additional
detail on offshoring of services. Business functions associated with
offshoring tend to be those that are digitized, capable of being
performed at a distance, and whose product delivery can be managed
using relatively new forms of advanced telecommunications. Examples of
these business functions include software programming and design, call
center operations, accounting and payroll operations, medical records
transcription, paralegal services, and software research and testing.
According to some studies, the criteria for successful offshoring of
services include business functions that involve 1) a high information
content that can be standardized and digitized, 2) job processes that
can be separated and documented step-by-step, and 3) no face-to-face
customer service requirements. Although occupations associated with
services offshoring were predominantly in the IT sector, IT-enabled
jobs are also vulnerable to offshoring and span several occupational
classifications. These categories include business and financial
operations, office and administrative support, medical
transcriptionists, paralegals and legal assistants, and architecture
and engineering. In comparing services offshoring to the parallel
offshoring dynamic in the manufacturing sector, one recent study states
that services offshoring is structurally simpler in terms of resources
and space and equipment requirements. The authors conclude that
offshoring of services may therefore proceed more quickly.[Footnote 21]

Federal Statistics Provide Limited Insight into Offshoring Trends:

Services Trade Data Cover Some Transactions Associated with Offshoring:

U.S. government data provide some insight into the trends in offshore
sourcing of services by the private sector, but they do not provide a
complete picture of offshoring of the business transactions that the
term offshoring can encompass. The Department of Commerce's Bureau of
Economic Analysis (BEA) collects data on trade (imports and exports) in
private services between the U.S. and foreign entities.[Footnote 22]
BEA includes in "Total Private Services" trade five subcategories:
travel, passenger fares, other transportation (e.g., freight and
shipping), royalties and license fees, and "Other Private Services."
The category "Other Private Services" includes many of the services
that are generally associated with offshoring. Imports in this category
have grown from $23.9 billion in 1992 to $69.4 billion in
2002.[Footnote 23] These imports represent about a third of 2002
services imports.

The category "Other Private Services" is further divided into six
subcategories: education; financial services; insurance services;
telecommunications; business, professional and technical services; and
other services. Services captured in the subcategory of "Business,
Professional, and Technical" (BPT) services are those that are
generally associated with offshoring, such as accounting and
bookkeeping and computer programming services. BEA publishes detailed
data annually for more than 20 types of BPT services. In 2002, total
BPT services accounted for $37.5 billion, or 54 percent of "Other
Private Services." (See fig. 4.)

Figure 4: Total Private Services and Other Private Services, 2002:

[See PDF for image]

[End of figure]

The Department of Commerce's trade data show that imports of services
associated with offshoring are growing.[Footnote 24] For example, U.S.
imports of BPT services grew from $21.2 billion in 1997 to about $37.5
billion in 2002, an increase of 76.9 percent. U.S. exports of BPT
services increased 48.6 percent during this same period. It is
important to note that these import data show that U.S. entities have
been purchasing these services offshore, but they do not indicate
whether these entities had previously been purchasing these services
from domestic U.S. sources.

In addition, BEA data differentiate between affiliated and unaffiliated
trade, where affiliated trade occurs between foreign affiliates and
their parent companies. In 2002, affiliated trade accounted for $26.8
billion, or 71 percent of all BPT services imports. Data for affiliated
trade in BPT services are not broken down by country or by the
particular subcategories of BPT services discussed below. Data for
unaffiliated trade do provide this detail and show that U.S. imports of
BPT unaffiliated services grew from $6.4 billion in 1997 to $10.7
billion in 2002, an increase of 67.2 percent.

This partial list of subcategories under BPT services include the
following offshored services:

* accounting, auditing, and bookkeeping;

* architectural, engineering, and other technical;

* computer and data processing;

* database and other information;

* legal;

* management, consulting, and public relations; and:

* research, development, and testing.

Certain unaffiliated BPT services imports--most notably accounting and
auditing services; computer and data processing services; and research,
development and testing services--have grown rapidly in recent years.
For example, imports of computer and data processing services have
grown steadily from $636 million in 1997 to $1.5 billion in 2000 and
declining to $1.1 billion in 2002 for an overall increase of 66.2
percent between 1997 and 2002. The increase in 2000 may be due in part
to the Year 2000 date change crisis. U.S. firms, in response to a tight
supply of computer programmers in the late 1990s, turned to companies
principally located in India to make the code fixes needed to avert
problems with computer systems when the year 2000 arrived. (See fig.
5.)

Figure 5: Growth in Unaffiliated U.S. Imports of Selected Components of
Business, Professional, and Technical Services, 1992-2002:

[See PDF for image]

[A] Values are in nominal dollars. We did not adjust for possible
changes in prices (e.g., inflation) because BEA does not produce price
indexes at this detailed level of data.

[End of figure]

Although much attention is currently focused on developing countries
that are increasingly exporting services to the United States, Canada,
and the United Kingdom, nevertheless these three countries remain the
leading exporters of services, both for Total Private Services and the
subcategory unaffiliated BPT services. In 2002, Canada and the United
Kingdom accounted for 43.6 percent of all imports of unaffiliated BPT
services to the United States, and they were also major destinations
for U.S. exports of these services. (See fig. 6.)

Figure 6: U.S. Unaffiliated Imports and Exports of Business,
Professional, and Technical Services, by Country of Origin, 2002:

[See PDF for image]

[End of figure]

As figure 6 also shows, India is ranked eighth among countries from
which the United States imported unaffiliated BPT services in 2002.
Some BPT services' subcategories (e.g., data and computer processing
services) are available by country.[Footnote 25] In some BPT services'
subcategories, imports from India have increased. In particular,
imports of India's computer and data processing services rose from $8.0
million in 1997 to $133.0 million in 2000, but then declined to $76.0
million in 2002, for an overall increase of 850 percent from 1997 to
2002.[Footnote 26] (See fig. 7.)

Figure 7: U.S. Unaffiliated Imports from India of Selected Business,
Professional, and Technical Services:

[See PDF for image]

Note: Values are in nominal dollars. We did not adjust for possible
changes in prices (e.g., inflation) since BEA does not produce price
indexes at this detailed level of data.

[End of figure]

Besides importing services provided offshore, the United States is also
a supplier of services to the rest of the world. These U.S. services
exports include some services that can be characterized as "inshoring."
While we did not examine U.S. services exports in detail, some of these
exports would contribute to domestic U.S. employment. In addition, the
United States maintains a trade surplus in private services and most
subcategories of services trade. BEA estimates that in 2002, the United
States exported $279.5 billion and imported $205.2 billion in Total
Private Services, for a surplus of $74.3 billion (down from a high of
$87.9 billion in 1997). The average annual growth rate for U.S. Total
Private Services from 1992 to 2002 was 5.6 percent for exports and 7.3
percent for imports. (See fig. 8.)

Figure 8: Total U.S. Services Trade and Unaffiliated Business,
Professional, and Technical Services Trade, 1992-2002:

[See PDF for image]

Note: Values are in nominal dollars. We did not adjust for possible
changes in prices (e.g., inflation) since BEA does not produce price
indexes at this detailed level of data.

[End of figure]

See appendix III for a table on U.S. imports and exports by country of
trade in business, professional, and technical services and for further
details on the limitations of that data for analysis of offshoring.

U.S. Foreign Investment Captures Other Aspects of Offshoring:

U.S. government data on direct investment abroad by U.S. multinational
companies producing services abroad provide information on aspects of
offshoring, such as supplier countries and the distribution of labor
between parent companies and affiliates.[Footnote 27] U.S. direct
investment in developing countries that are frequently cited as
suppliers of offshore services (e.g., India, the Philippines, and
Malaysia) is relatively small--about 4 percent or less of total U.S.
direct investments in each case. U.S. direct investment in these
countries tends to be concentrated in the manufacturing sector and, to
a more limited extent, in certain services industries associated with
offshoring, such as the professional, scientific, and technical
industry, and the information industry.[Footnote 28] However, the
majority of U.S. direct investment is concentrated in other developed
countries. For example, 60 percent of U.S. direct investment abroad in
2002 was accounted for by the European Union, Canada, and Japan. Table
2 lists selected developed and developing countries and their share of
total U.S. direct investment abroad in 2002 (the most recent year
available), as well as these countries' share of investment in
different industries.[Footnote 29] See appendix IV for a table on U.S.
foreign direct investment and further details of the limitations of
that data for analysis of offshoring.

Table 2: Selected Destinations for U.S. Foreign Direct Investment (FDI)
Abroad: Total by Country, 2002; Share of Total FDI, 2002; and
Percentage Change from 1999:

All countries:
U.S. FDI 2002 (billions U.S. dollars): $1,521;
Share of total U.S. FDI, 2002: 100.00%;
Percentage change 1999-2002: 25%.

Developed countries: European Union (15);
U.S. FDI 2002 (billions U.S. dollars): $700;
Share of total U.S. FDI, 2002: 46.02%;
Percentage change 1999-2002: 24%.

Developed countries: European Union: United Kingdom;
U.S. FDI 2002 (billions U.S. dollars): $255;
Share of total U.S. FDI, 2002: 16.79%;
Percentage change 1999-2002: 18%.

Developed countries: European Union: Ireland;
U.S. FDI 2002 (billions U.S. dollars): $42;
Share of total U.S. FDI, 2002: 2.74%;
Percentage change 1999-2002: 66%.

Developed countries: Canada;
U.S. FDI 2002 (billions U.S. dollars): $153;
Share of total U.S. FDI, 2002: 10.03%;
Percentage change 1999-2002: 28%.

Developed countries: Japan;
U.S. FDI 2002 (billions U.S. dollars): $66;
Share of total U.S. FDI, 2002: 4.32%;
Percentage change 1999-2002: 19%.

Developed countries: Singapore;
U.S. FDI 2002 (billions U.S. dollars): $61;
Share of total U.S. FDI, 2002: 4.03%;
Percentage change 1999-2002: 197%.

Developed countries: Australia;
U.S. FDI 2002 (billions U.S. dollars): $36;
Share of total U.S. FDI, 2002: 2.39%;
Percentage change 1999-2002: 3%.

Developed countries: Hong Kong;
U.S. FDI 2002 (billions U.S. dollars): $36;
Share of total U.S. FDI, 2002: 2.35%;
Percentage change 1999-2002: 57%.

Developing countries: Mexico;
U.S. FDI 2002 (billions U.S. dollars): $58;
Share of total U.S. FDI, 2002: 3.82%;
Percentage change 1999-2002: 56%.

Developing countries: Brazil;
U.S. FDI 2002 (billions U.S. dollars): $32;
Share of total U.S. FDI, 2002: 2.09%;
Percentage change 1999-2002: -15%.

Developing countries: China;
U.S. FDI 2002 (billions U.S. dollars): $10;
Share of total U.S. FDI, 2002: 0.68%;
Percentage change 1999-2002: 9%.

Developing countries: Malaysia;
U.S. FDI 2002 (billions U.S. dollars): $9;
Share of total U.S. FDI, 2002: 0.56%;
Percentage change 1999-2002: 38%.

Developing countries: Poland;
U.S. FDI 2002 (billions U.S. dollars): $5;
Share of total U.S. FDI, 2002: 0.31%;
Percentage change 1999-2002: 45%.

Developing countries: Philippines;
U.S. FDI 2002 (billions U.S. dollars): $4;
Share of total U.S. FDI, 2002: 0.27%;
Percentage change 1999-2002: 16%.

Developing countries: India;
U.S. FDI 2002 (billions U.S. dollars): $4;
Share of total U.S. FDI, 2002: 0.24%;
Percentage change 1999-2002: 54%.

Developing countries: South Africa;
U.S. FDI 2002 (billions U.S. dollars): $3;
Share of total U.S. FDI, 2002: 0.23%;
Percentage change 1999-2002: -1%.

Developing countries: Hungary;
U.S. FDI 2002 (billions U.S. dollars): $2;
Share of total U.S. FDI, 2002: 0.16%;
Percentage change 1999-2002: 2%.

Developing countries: Czech Republic;
U.S. FDI 2002 (billions U.S. dollars): $1;
Share of total U.S. FDI, 2002: 0.09%;
Percentage change 1999-2002: 30%.

Developing countries: Russia;
U.S. FDI 2002 (billions U.S. dollars): $1;
Share of total U.S. FDI, 2002: 0.04%;
Percentage change 1999-2002: -63%.

Source: GAO analysis of Department of Commerce data.

Notes: Data are taken from the Bureau of Economic Analysis's Survey of
Current Business, November 2003.

Country-level U.S. foreign direct investment abroad is valued on an
historical cost basis. See [Hyperlink, http://www.bea.gov] for more
information.

Countries were selected because they are major recipients of U.S.
direct investment or they are frequently cited as suppliers of
offshore services. Developed countries are those countries classified
as high- income economies by the World Bank. Developing countries are
those countries classified as low-income economies through upper-
middle income economies by the World Bank.

[End of table]

Data on U.S. multinational companies' operations also provide
information on the distribution of labor and assets between the U.S.-
based parent companies and their foreign-based affiliates.[Footnote
30] These data show that the share of these companies' employment in
the United States has declined somewhat over the past decade, although
about 71 percent of their employment is still based in the United
States and only 10 percent of their overseas employment is located in
developing countries. (See table 3.) However, according to BEA, the
labor force in low-wage countries is growing at a slightly faster rate
(7 percent per year) than the labor force in high-wage countries (3
percent) from 1991 to 2001. Similarly, the great majority of U.S.
companies' assets are located in the United States (70 percent) or in
other developed countries (26 percent), rather than in developing
countries (4 percent).

Table 3: Employment in U.S. Multinational Companies in the United
States and Abroad, 2001:

Countries: Total MNC Employment (worldwide);
Employment (in thousands): 1999: 32,227;
Employment (in thousands): 2000: 33,598;
Employment (in thousands): 2001: 33,226;
Share of total: 2001: 100%.

Countries: U.S. parent companies;
Employment (in thousands): 1999: 23,007;
Employment (in thousands): 2000: 23,885;
Employment (in thousands): 2001: 23,450;
Share of total: 2001: 71%.

Countries: All foreign countries;
Employment (in thousands): 1999: 9,220;
Employment (in thousands): 2000: 9,713;
Employment (in thousands): 2001: 9,776;
Share of total: 2001: 29%.

Countries: Developed countries;
Employment (in thousands): 2000: 6,269;
Employment (in thousands): 2001: 6,348;
Share of total: 2001: 19%.

Developed Countries: European Union (15);
Employment (in thousands): 1999: 3,474;
Employment (in thousands): 2000: 3,684;
Employment (in thousands): 2001: 3,735;
Share of total: 2001: 11%.

Developed Countries: United Kingdom;
Employment (in thousands): 1999: 1,162;
Employment (in thousands): 2000: 1,272;
Employment (in thousands): 2001: 1,280;
Share of total: 2001: 4%.

Developed Countries: Ireland;
Employment (in thousands): 1999: 86;
Employment (in thousands): 2000: 93;
Employment (in thousands): 2001: 89;
Share of total: 2001: [A].

Developed Countries: Canada;
Employment (in thousands): 1999: 1,073;
Employment (in thousands): 2000: 1,162;
Employment (in thousands): 2001: 1,156;
Share of total: 2001: 3%.

Developed Countries: Japan;
Employment (in thousands): 1999: 399;
Employment (in thousands): 2000: 444;
Employment (in thousands): 2001: 495;
Share of total: 2001: 1%.

Developed Countries: Singapore;
Employment (in thousands): 1999: 120;
Employment (in thousands): 2000: 123;
Employment (in thousands): 2001: 117;
Share of total: 2001: [A].

Developed Countries: Australia;
Employment (in thousands): 1999: 312;
Employment (in thousands): 2000: 322;
Employment (in thousands): 2001: 317;
Share of total: 2001: 1%.

Developed Countries: Hong Kong;
Employment (in thousands): 1999: 98;
Employment (in thousands): 2000: 100;
Employment (in thousands): 2001: 93;
Share of total: 2001: [A].

Countries: Developing countries;
Employment (in thousands): 2000: 3,444;
Employment (in thousands): 2001: 3,427;
Share of total: 2001: 10%.

Developing Countries: Mexico;
Employment (in thousands): 1999: 995;
Employment (in thousands): 2000: 1,066;
Employment (in thousands): 2001: 1,017;
Share of total: 2001: 3%.

Developing Countries: Brazil;
Employment (in thousands): 1999: 422;
Employment (in thousands): 2000: 415;
Employment (in thousands): 2001: 406;
Share of total: 2001: 1%.

Developing Countries: China;
Employment (in thousands): 1999: 294;
Employment (in thousands): 2000: 293;
Employment (in thousands): 2001: 314;
Share of total: 2001: 1%.

Developing Countries: Malaysia;
Employment (in thousands): 1999: 128;
Employment (in thousands): 2000: 132;
Employment (in thousands): 2001: 129;
Share of total: 2001: [A].

Developing Countries: Poland;
Employment (in thousands): 1999: 72;
Employment (in thousands): 2000: 84;
Employment (in thousands): 2001: 77;
Share of total: 2001: [A].

Developing Countries: Philippines;
Employment (in thousands): 1999: 85;
Employment (in thousands): 2000: 86;
Employment (in thousands): 2001: 82;
Share of total: 2001: [A].

Developing Countries: India;
Employment (in thousands): 1999: 97;
Employment (in thousands): 2000: 100;
Employment (in thousands): 2001: 105;
Share of total: 2001: [A].

Developing Countries: South Africa;
Employment (in thousands): 1999: 138;
Employment (in thousands): 2000: 139;
Employment (in thousands): 2001: 136;
Share of total: 2001: [A].

Developing Countries: Hungary;
Employment (in thousands): 1999: 72;
Employment (in thousands): 2000: 51;
Employment (in thousands): 2001: 53;
Share of total: 2001: [A].

Developing Countries: Czech Republic;
Employment (in thousands): 1999: 49;
Employment (in thousands): 2000: 54;
Employment (in thousands): 2001: 57;
Share of total: 2001: [A].

Developing Countries: Russia;
Employment (in thousands): 1999: 34;
Employment (in thousands): 2000: 32;
Employment (in thousands): 2001: 34;
Share of total: 2001: [A].

Source: GAO analysis of Department of Commerce data.

Notes: Countries were selected because they are major recipients of
U.S. direct investment or they are frequently cited as suppliers of
offshore services (as in table 1). Developed countries are those
countries classified as high-income economies by the World Bank.
Developing countries are those countries classified as low-income
economies through upper-middle income economies by the World Bank.

Shares may not sum to 100 percent due to rounding.

[A] Less than 1 percent of total U.S. MNC employment worldwide:

[End of table]

Data on operations of majority-owned foreign affiliates of U.S.
multinational companies indicate that they are primarily investing in
overseas markets to produce services for those markets, rather than
supplying services back to the United States. As figure 9 shows, except
for a few countries (e.g., Israel, Bermuda, and Barbados) less than 15
percent of the sales of U.S. companies' majority owned-foreign
affiliates' services are exported to the United States. Rather, most of
the services sales take place in the foreign market in which the
affiliate operates or in another foreign market. According to BEA, the
available data on U.S. multinational companies' operations do not show
whether multinational companies' new investments are replacing their
U.S.-based operations or substituting for exports to foreign markets
that would have been supplied by their U.S.-based operations. However,
the data currently available do not show any significant shifts or
sizable investment in developing countries that may be used as a
platform for offshoring. As more recent data become available, they
will provide additional insight into the importance of these trends.

Figure 9: Share of U.S. Majority-Owned Nonbank Foreign Affiliate's
Total Sales of Services Exported to the United States, 2001:

[See PDF for image]

Note: Countries were selected because they are major recipients of U.S.
direct investment or they are frequently cited as suppliers of offshore
services (as in table 1) or they were large exporters of services to
the United States as a share of their total sales. Data was not
available for all countries.

[End of figure]

Recent Trends in Federal Government Offshoring Show Mixed Results,
While Comprehensive State Data Do Not Exist:

The total dollar value of the federal government's services contracts
with offshore performance or manufacture locations has increased over
the past 5 years; however, relative to all federal contracts for
services, the 5-year trend in offshoring is relatively stable. In the
federal government, the General Services Administration's Federal
Procurement Data System (FPDS) is the central database of information
on procurement actions. FPDS contains detailed information on
contracting actions for amounts over $25,000, including the amount
obligated, the types of goods and services purchased, and information
on principal place of performance[Footnote 31] and country of
manufacture. However, FPDS has limitations and may understate the
total amount of IT and other services that are offshored by the federal
government. For example, some agencies are not required to report
their procurement activities to FPDS,[Footnote 32] and the system
excludes detailed information on contract actions of $25,000 or less
and purchase card data. Moreover, as we have previously reported,
because FPDS relies on federal agencies for procurement information,
these data are only as reliable, accurate, and complete as the
information provided by the agencies, and not all agency data are
reliable.[Footnote 33] In particular, the principal place of
performance for the service can be difficult to determine, especially
when work is performed at multiple contractor and/or subcontractor
locations. According to a GSA official responsible for this system,
agencies may report company billing or home office addresses if the
place of performance cannot be determined.

Although a reliable total amount of the federal government's offshoring
activities is not available from FPDS, the FPDS data over the last 5
years is sufficiently complete and consistent to be used to illustrate
trends.[Footnote 34] As shown in figure 10, from fiscal years 1999
through 2003, the total dollar value of all services contracting
actions increased about 40 percent. Moreover, during the same period,
the total dollar value of all services contracts with performance or
manufacture locations in foreign countries increased by about 64
percent,[Footnote 35] from $6.4 billion in fiscal year 1999 to $10.6
billion in fiscal year 2003. However, the percentage of total dollars
associated with foreign performance or manufacture locations relative
to the total dollar value of all services contracts performed in all
locations (U.S. and foreign) remained relatively stable, with a range
of 5 percent to 7 percent over the 5-year period. Similarly, in the
case of IT services alone, the percentage of total dollars associated
with foreign performance or manufacture locations was relatively
stable throughout the period, ranging from 1 to 3 percent of the total
value of IT services contracts. In addition, there were large dollar
value fluctuations (both increases and decreases) from year to year.

Figure 10: Change in Dollar Value of the Federal Government's
Procurement of IT and Other Services by Performance Location between
Fiscal Years 1999-2003:

[See PDF for image]

[End of figure]

With respect to state governments' procurement of services from
offshore sources, comprehensive data depicting the extent to which
offshoring is used do not exist. However, there are anecdotal accounts
of the use of offshoring by state governments. For example, in response
to a legislative request, one state asked all its cabinet agencies,
statewide elected officials, and institutions of higher education
whether they had knowledge of any contracts awarded by their respective
organizations in which all or part of the work was being performed
overseas. Responses showed that 29 of 42 organizations reported
knowledge of some contract awards that involved overseas work, such as
contracts for software development performed by an Indian subsidiary of
a U.S. firm. Nevertheless, organizations representing state executive
and legislative officials, chief information officers, and procurement
officials told us that they had no comprehensive data, studies, or
research that indicated how much state governments were using offshore
sourcing in procuring IT and other services.

Federal Statistics and Private Sector Research Provide Limited
Information about the Effects of Offshoring on the U.S. Workforce and
the Broader Economy:

Offshoring has direct, short-term effects on U.S. employment that
available data can partially capture. One federal employment data
series identifies some job layoffs that are attributable to offshoring.
In contrast, other federal employment data series provide contextual
information about changes in employment levels for various industries
and occupations, including those that have been associated with
offshoring. Private sector studies have sought to analyze not only the
employment effects of offshoring but also the indirect, longer-term
effects on the broader economy.

Employment Data Provide Limited Information about Offshoring's Impact
on the Workforce:

The Department of Labor collects a range of labor market data that
provide information on trends in employment, but generally its data
series were not designed to identify causes for employment changes. As
a result, these data do not lend themselves to providing information on
the employment effects of offshoring. However, the Mass Layoff Survey
provides some limited information on offshoring, and several other
labor data series show general employment trends that provide a context
for understanding offshoring's effects. In addition to offshoring,
other factors affecting employment trends in the last few years include
the economic recession and the collapse of the dot.com bubble. The
Labor data series include the following:

* Mass Layoff Survey (MLS). The MLS is a national survey that collects
information on reasons for long-term job losses with reports published
by the Bureau of Labor Statistics (BLS) on a quarterly basis.[Footnote
36] The survey is a federal-state program which tracks major job
cutbacks based on state unemployment insurance databases.
Establishments with over 50 employees that have at least 50 initial
unemployment insurance claims during a 5-week period are contacted by
the state agency. If the separations are for at least 31 days, data are
collected from the employers on the total number of separations as well
as the reasons for separation. The employers are asked to provide the
reason for the layoff, and the state official then picks from a list of
more than 25 possible reasons for the layoff action. Prior to 2004, one
of these reasons was "overseas relocation" allowing the MLS to capture
limited data on offshoring activity. In January 2004, to enhance its
collection of offshoring-related data, the BLS began to ask specific
questions about job losses involving domestic and overseas work
relocation.[Footnote 37] While this change will result in better
information on offshoring in the future, the 2004 data on overseas
relocation are not comparable to pre-2004 data.

* Current Employment Statistics (CES). The CES survey is an employer-
based survey of payroll records that provides monthly data on the
number of payroll jobs in nonfarm industries. CES data, which cover
more than 300,000 businesses on a monthly basis and provide employment
statistics by industry, are often used as indicators of current
economic trends.[Footnote 38] CES provides information on employment
trends in industries, including those that have been associated with
offshoring.

* Occupational Employment Statistics (OES). The OES program provides
information on employment and wages by occupation. The OES survey
gathers data from 400,000 establishments each year on employment and
wages.[Footnote 39] The survey covers 400 industries, 23 major
occupational groups, and more than 770 detailed occupations. Until
2001, the OES survey sampled about 400,000 establishments during the
fourth quarter of each year. In November 2002, the OES survey began
sampling about 200,000 establishments in November and May of each
year.[Footnote 40] OES provides information on employment trends in
occupations, including those that have been associated with offshoring.

* Employment Projections. BLS uses projections of the labor force and
economic growth, as well as expert judgments about future trends in
different occupations, to develop an occupational projection
model.[Footnote 41]

The Mass Layoff Survey Provides Limited Information on Services
Offshoring:

Because it is based on interviews with employers, MLS provides a
vehicle for collecting direct, timely data on offshoring. Due to the
MLS's coverage limitations, however, its data should be viewed as an
imperfect indicator of offshoring-caused job losses. MLS identifies
only a portion of total layoffs because it does not include small
establishments or layoffs involving fewer than 50 employees. For
example, in 2003, the survey covered 4.6 percent of all U.S.
establishments and 56.7 percent of all U.S. workers. In addition, some
employers may be unwilling to provide information when interviewed
about reasons for layoffs. For the first quarter of 2004, 7.2 percent
of firms with mass layoff events refused to participate in the survey.
Pre-2004 MLS data had additional limitations regarding reasons for
layoffs. According to BLS officials, in surveys prior to 2004,
offshoring may have been involved in some instances when reasons such
as "financial difficulty," "business ownership change," or
"reorganization within the company" were provided by MLS respondents.

Even with these limitations, MLS data provide some information that is
useful for understanding services offshoring. For example, the data
show that "overseas relocation" was given as a reason for mass-layoff
job loss for a small fraction of workers laid off during the 1996-2003
period--of 1.5 million layoffs reported in the 2003 MLS, 13,000 (0.9
percent) were reportedly due to overseas relocation. The data also
indicate that almost all layoffs (about 96 percent) occurred in the
manufacturing sector. The data also indicate that layoffs associated
with "overseas relocation" reported by MLS peaked in 2002 (after rising
sharply in 2001) but declined in 2003. Preliminary data for the first
quarter of 2004 show that of a total of 239,361 separations, 4,633 (or
1.9 percent) were attributable to offshoring.[Footnote 42] Domestic
work relocation accounted for 9,985 separations (4.2 percent).

Current Employment Statistics Show Overall Trends in Offshoring-
Associated Industries:

Although general employment data such as CES are not designed to
isolate job losses attributable to any specific causes, they can
provide some contextual information relevant to understanding job
losses. CES data indicate that overall employment, including industries
associated with offshoring, began to decline after peaking in 2001.
Figure 11 shows percentage changes in employment between March 2001
(the beginning of the recession) and June 2004 for selected industries
associated with offshoring.[Footnote 43] Job declines after March 2001
varied widely among industries associated with offshoring and generally
were more severe than declines in the overall private-sector economy.
For example, the average annual rate of decline over this period was
5.7 percent in computer systems design and related services industries
and 7.9 percent for accounting and bookkeeping, while the decline in
the business support services was about 1.2 percent. During this
period, total nonfarm employment increased by 0.2 percent.

Figure 11: Annual Average Percentage Change in Private Sector
Employment in Selected Industries, from March 2001-June 2004:

[See PDF for image]

Notes: June 2004 employment level is given in thousands in parentheses.
The payroll category is a subset of accounting and bookkeeping, and the
telephone call centers category is a subset of business support.

[End of figure]

CES data show recent signs of improvement in employment. After falling
in each of the first three quarters of 2003, total nonfarm employment
edged up in the fourth quarter. (See table 4.) From the last quarter of
2003 until the second quarter of 2004, the overall economy gained about
1.1 million jobs (a 0.9 percent increase). By comparison, selected
industries associated with offshoring saw deeper job losses and slower,
more volatile recovery. Job loss for these industries began to
gradually ease in the second quarter of 2003. Overall, employment in
the selected industries has increased by about 21,000 jobs between the
second quarter of 2003 and the first quarter of 2004 (a 0.3 percent
increase). In a few of these industries, job losses appear to have
reversed. The employment level in the architectural and engineering
services industry began to rise in the second half of 2003. Other
industries, such as legal services, computer systems design and related
services, business support services, and Internet service providers,
search engines, and data processing, experienced job gains in the
second quarter of 2004.

Table 4: Change in Employment of Total Nonfarm and Selected Industries,
Quarterly Averages, 2001-2004:

Quarter: Jan.-Mar.-2001;
Employment level for total nonfarm (in thousands): 132,462;
Employment level in selected industries associated with offshoring
(in thousands): 7,185.

Quarter: Apr.-June;
Employment level for total nonfarm (in thousands): 132,187;
Percentage change from previous quarter: -0.21%%;
Employment level in selected industries associated with offshoring
(in thousands): 7,175;
Percentage change from previous quarter: -0.15%%.

Quarter: July-Sept;
Employment level for total nonfarm (in thousands): 131,789;
Percentage change from previous quarter: -0.30%;
Employment level in selected industries associated with offshoring
(in thousands): 7,102;
Percentage change from previous quarter: -1.01%.

Quarter: Oct.-Dec;
Employment level for total nonfarm (in thousands): 130,911;
Percentage change from previous quarter: -0.67%;
Employment level in selected industries associated with offshoring
(in thousands): 6,989;
Percentage change from previous quarter: -1.59%.

Quarter: Jan.-Mar. 2002;
Employment level for total nonfarm (in thousands): 130,448;
Percentage change from previous quarter: -0.35%;
Employment level in selected industries associated with offshoring
(in thousands): 6,844;
Percentage change from previous quarter: -2.07%.

Quarter: Apr.-June;
Employment level for total nonfarm (in thousands): 130,389;
Percentage change from previous quarter: -0.05%;
Employment level in selected industries associated with offshoring
(in thousands): 6,772;
Percentage change from previous quarter: -1.05%.

Quarter: July-Sept;
Employment level for total nonfarm (in thousands): 130,287;
Percentage change from previous quarter: -0.08%;
Employment level in selected industries associated with offshoring
(in thousands): 6,694;
Percentage change from previous quarter: -1.15%.

Quarter: Oct.-Dec;
Employment level for total nonfarm (in thousands): 130,248;
Percentage change from previous quarter: -0.03%;
Employment level in selected industries associated with offshoring
(in thousands): 6,632;
Percentage change from previous quarter: -0.93%.

Quarter: Jan.-Mar. 2003;
Employment level for total nonfarm (in thousands): 130,047;
Percentage change from previous quarter: -0.15%;
Employment level in selected industries associated with offshoring
(in thousands): 6,568;
Percentage change from previous quarter: -0.95%.

Quarter: Apr.-June;
Employment level for total nonfarm (in thousands): 129,878;
Percentage change from previous quarter: -0.13%;
Employment level in selected industries associated with offshoring
(in thousands): 6,531;
Percentage change from previous quarter: -0.57%.

Quarter: July-Sept;
Employment level for total nonfarm (in thousands): 129,820;
Percentage change from previous quarter: -0.04%;
Employment level in selected industries associated with offshoring
(in thousands): 6,490;
Percentage change from previous quarter: -0.63%.

Quarter: Oct.-Dec;
Employment level for total nonfarm (in thousands): 130,002;
Percentage change from previous quarter: 0.14%;
Employment level in selected industries associated with offshoring
(in thousands): 6,508;
Percentage change from previous quarter: 0.29%.

Quarter: Jan.-Mar. 2004;
Employment level for total nonfarm (in thousands): 130,367;
Percentage change from previous quarter: 0.28%;
Employment level in selected industries associated with offshoring
(in thousands): 6,497;
Percentage change from previous quarter: -0.17%.

Quarter: Apr.-June;
Employment level for total nonfarm (in thousands): 131,119;
Percentage change from previous quarter: 0.58%;
Employment level in selected industries associated with offshoring
(in thousands): 6,529;
Percentage change from previous quarter: 0.49%.

Source: GAO presentation of Department of Labor data.

Notes: The selected industries are: telecommunications; ISPs, search
portals, and data processing; legal services; accounting and
bookkeeping services; architectural and engineering services; computer
systems design and related services; and business support services.
Only industries for which seasonally adjusted data were available were
included. Industries for which seasonally adjusted data were not
available, including scientific research and development, telephone
call centers, and software publishers, were excluded.

[End of table]

Data are taken from BLS's Current Employment Statistics (seasonally
adjusted).

The changes in the national employment level over time reflect the net
result of jobs added and jobs eliminated--for all causes. Services
offshoring has been frequently associated with the jobless recovery of
2003, but studies suggest that much of the job loss is due to the 2001
recession, increases in productivity, and corrections in the wake of
the dot.com bubble. However, general employment data do not allow
isolating job losses attributable to offshoring. It is also important
to note that even if there were no net job losses during a particular
time period--meaning that the number of job losses did not exceed the
number of job gains--it is still possible that some jobs could have
been lost as a result of offshoring.

Most industries associated with services offshoring that saw sharp
declines after 2001 had also experienced unusually strong job growth
during the previous decade. As figure 12 shows, during this expansion,
growth in employment was especially strong in IT-related sectors. For
example, employment in the computer systems and design industry grew at
an average annual rate of 11.1 percent, compared with 1.7 percent in
the total nonfarm employment. This supports the view that at least some
of recent job losses are due to the collapse of the dot.com. bubble in
IT-related sectors.

Figure 12: Change in Private Sector Employment in Selected IT-Related
Industries, Annual Averages, 1990-2001:

[See PDF for image]

Note: June 2004 employment level in thousands in parenthesis. The
payroll category is a subset of accounting and bookkeeping, and the
telephone call centers category is a subset of business support.

[End of figure]

Occupational Employment Statistics Show Earnings in Occupations
Associated with Offshoring:

Although some analysts have raised concerns that services offshoring
has been affecting higher-skill, higher-paying jobs, the occupational
earnings data show a mixed picture. As shown in table 5, OES data
indicate that average wages of most occupations associated with
offshoring are above:

the U.S. average wage.[Footnote 44] However, the average wages for the
two largest occupations in terms of numbers of workers (office and
administrative support and sales and related occupations) are below the
U.S. average wage.

Table 5: Average Hourly Wages and Employment Levels for Occupational
Categories Associated with Offshoring, 2002:

Major Standard Occupational Categories: Management;
Average hourly wage: $37.92;
Employment levels: (in thousands): 7,092.

Major Standard Occupational Categories: Business and financial
operations;
Average hourly wage: $25.65;
Employment levels: (in thousands): 4,772.

Major Standard Occupational Categories: Computer and mathematical;
Average hourly wage: $29.63;
Employment levels: (in thousands): 2,773.

Major Standard Occupational Categories: Architecture and engineering;
Average hourly wage: $27.89;
Employment levels: (in thousands): 2,411.

Major Standard Occupational Categories: Life, physical, and social
science;
Average hourly wage: $25.19;
Employment levels: (in thousands): 1,079.

Major Standard Occupational Categories: Legal;
Average hourly wage: $37.18;
Employment levels: (in thousands): 935.

Major Standard Occupational Categories: Arts, design, entertainment,
sports, and media;
Average hourly wage: $20.03;
Employment levels: (in thousands): 1,504.

Major Standard Occupational Categories: Sales and related occupations;
Average hourly wage: $14.72;
Employment levels: (in thousands): 13,340.

Major Standard Occupational Categories: Office and administrative
support;
Average hourly wage: $13.42;
Employment levels: (in thousands): 22,755.

Major Standard Occupational Categories: All occupations;
Average hourly wage: $17.10;
Employment levels: (in thousands): 127,524.

[End of table]

Source: Bureau of Labor Statistics, Occupational Employment Statistics,
2002:

Note: 2002 data are the latest available data for this data series.

Like CES, OES employment data are not designed to isolate employment
changes attributable to specific causes. The data, however, offer
recent employment trends by occupation relevant to understanding
offshoring. The OES data indicate that some occupations associated
with offshoring saw declines in employment, while others saw increases
in employment between 2001 (the year of recession) and 2002--the
latest year for which comparable occupational data are available.
[Footnote 45] Table 6 shows percentage changes in employment in 2001
and 2002 for selected occupations associated with offshoring.
Employment in management, computer and mathematical science, and
architecture and engineering declined by 1.7 percent, 1.9 percent, and
3.1 percent, respectively. Employment in business and financial
operations, legal, and life, physical, and social science categories
increased by 2.0 percent, 2.8 percent, and 1.0 percent, respectively.
On average, employment in all occupations declined by 0.4 percent.

Table 6: Percentage Employment Change in Selected Occupations, 2001-
2002:

Major standard occupational categories: Management;
Employment level (in thousands): 2001: 7,212;
Employment level (in thousands): 2002: 7,092;
2001-2002 percentage change: -1.7%%.

Major standard occupational categories: Business and financial
operations;
Employment level (in thousands): 2001: 4,677;
Employment level (in thousands): 2002: 4,772;
2001-2002 percentage change: 2.0%.

Major standard occupational categories: Computer and mathematical;
Employment level (in thousands): 2001: 2,826;
Employment level (in thousands): 2002: 2,773;
2001-2002 percentage change: - 1.9%.

Major standard occupational categories: Architecture and engineering;
Employment level (in thousands): 2001: 2,489;
Employment level (in thousands): 2002: 2,411;
2001-2002 percentage change: - 3.1%.

Major standard occupational categories: Life, physical, and social
science;
Employment level (in thousands): 2001: 1,068;
Employment level (in thousands): 2002: 1,079;
2001-2002 percentage change: 1.0%.

Major standard occupational categories: Legal;
Employment level (in thousands): 2001: 909;
Employment level (in thousands): 2002: 935;
2001-2002 percentage change: 2.8%.

Major standard occupational categories: Arts, design, entertainment,
sports, and media;
Employment level (in thousands): 2001: 1,509;
Employment level (in thousands): 2002: 1,504;
2001-2002 percentage change: -0.3%.

Major standard occupational categories: Sales and related occupations;
Employment level (in thousands): 2001: 13,418;
Employment level (in thousands): 2002: 13,340;
2001-2002 percentage change: -0.6%.

Major standard occupational categories: Office and administrative
support;
Employment level (in thousands): 2001: 22,799;
Employment level (in thousands): 2002: 22,755;
2001-2002 percentage change: -0.2%.

Major standard occupational categories: All occupations (U.S. total);
Employment level (in thousands): 2001: 127,980;
Employment level (in thousands): 2002: 127,524;
2001-2002 percentage change: -0.4%.

Source: Bureau of Labor Statistics, Occupational Employment Statistics.

[End of table]

BLS Employment Projections Show Job Trends in Occupations Associated
with Offshoring:

BLS's employment projections for 2002 through 2012 provide some insight
into the future trend of employment and, to some extent, of offshoring.
Total employment is projected to increase by 21 million jobs to 165
million jobs in 2012. The projections, however, indicate a slower
overall growth trajectory than the previous projections (for 2010), in
part reflecting the impact of the 2001 recession. While total
employment is projected to increase by 14.8 percent to 165.3 million
jobs over the 2002 through 2012 period, this figure represents 2.4
million fewer jobs than the level projected for the 2000 through 2010
period.[Footnote 46]

Projections indicate that IT-related occupations are expected to grow
faster than most occupations by 2012. Seven of the 30 fastest-growing
occupations are computer related, all requiring a bachelor's degree or
higher. The rate of growth for these occupations for the 2002 through
2012 projections is significantly lower than the rate projected for the
period 2000 through 2010. Thirteen of the occupations with the largest
projected declines are office and administrative support, none
requiring a bachelor's degree. Generally, the rate of decline for these
occupations increased from the 2010 to 2012 projections.

According to BLS officials, BLS did not systematically take into
account offshoring in its 2012 employment projections, prepared in
2003, but some analysts took offshoring into account during the survey
when they were considering projected changes in occupational staffing
patterns. Moreover, some of the impact of recent offshoring was likely
reflected in the baseline employment level used in the
projections.[Footnote 47] As a result, the 2012 projections, which
generally indicate a lower level of employment, a slower rate of growth
for many occupations, and a faster rate of decline for some occupations
than do the 2010 projections, might partially reflect the impact of
offshoring. The difference between the two sets of projections,
however, also reflects the impact of other factors, such as the
collapse of the dot.com bubble, recession, and increases in
productivity.

BLS is in the process of implementing changes to better capture the
impact of offshoring trends on employment patterns for its 2014
projections. As part of this effort, BLS is developing a list of
occupations that face high risk of offshoring; the list is intended to
alert BLS analysts to systematically seek out better information on
offshoring in determining employment trends in those occupations.
[Footnote 48] BLS does not expect to produce quantitative assessments
of offshoring.

Private Sector Research Studies Contribute to Discussion of Offshoring
Data:

Some private sector research studies have sought to provide projections
of the likely number of jobs that might be affected by offshoring in
future years. Other researchers have provided insight on, and to some
extent quantified, the broader effects of offshoring on other economic
factors such as productivity, prices, and economic growth.

Private Sector Studies Provide Forecasts of Potential Employment
Effects:

Private researchers and consultants have attempted to forecast the
effects of offshoring on employment in certain occupations potentially
affected by offshoring.[Footnote 49] The studies vary by the range of
industries or occupations examined, the economic variables measured,
and the time frames of their analyses. However, these studies face
challenges in estimating the effects of offshoring because these
studies often base their projections on federal statistics, and, as
previously described, federal statistics currently provide limited
information on the current level and effects of offshoring.

A number of these studies forecast the effect of offshoring on U.S.
employment in the industries or occupations that may be affected by
offshoring. For example, some studies project that between 100,000 and
500,000 information technology jobs will be displaced within the next
few years, and potentially several million jobs across all occupations
will shift outside the United States over the next decade. A widely
cited study by Forrester Research[Footnote 50] estimates that about 3.3
million jobs across all occupations will be shifted outside the United
States by 2015. Of the 3.3 million, Forrester estimates that about
600,000 will move between 2000 and 2005.[Footnote 51] The study looks
across services occupations from the OES series and subjectively
weights the impact of offshoring on current employment in the
occupation over time. Table 7 presents a summary of several studies
that project the effect of offshoring on U.S. employment.

Many of these studies of job losses do not take into account other
economic effects of offshoring that may offset the job losses, or they
focus on only one industry, such as financial services. For example,
Forrester does not try to estimate any other effects from offshoring,
such as potential expansion of employment in other sectors. In
addition, some studies base their estimates of future employment
effects due to offshoring on the employment level at a given point in
time, rather than taking into account how the size of the labor market
or a particular industry may change over time due to other factors.
Also, several of the studies rely on discussions and interviews with
industry representatives, rather than statistically valid surveys.

Although the importance of these projected job losses to particular
firms and industries may be considerable, overall they are relatively
small in terms of the U.S. economy. For example, BLS's Business
Employment Dynamics (BED) series shows that the U.S. economy creates
and destroys millions of jobs each year. In 2002, for example, gross
quarterly job gains and job losses averaged 7.9 million and 8 million,
respectively. Even during the economic expansion period in the late
1990s, job losses ranged between 7.4 million and 8.4 million per
quarter, although job gains were even larger.

Table 7: Private Sector Estimates of Offshoring and Its Potential
Effects:

Source: Bardhan & Kroll[A] (University of California, Berkeley);
Scope and methodology: Scope: All services occupations;
Scope and methodology: Methodology: Identifies factors associated with
offshoring, applies them to all occupations to determine which may be
affected, and sums total 2001 employment in these "at-risk"
occupations. Does not identify the extent to which offshoring occurs
in any particular occupation;
Findings: Finds fourteen million jobs in "at-risk" occupations in
2001, or 11 percent of U.S. workforce. These occupations include both
IT and other occupations; Describes this as the "outer limit" of
potential direct job loss, not actual number of jobs that will be
offshored. Study does not provide a lower limit of potential job
losses.

Source: Deloitte Research[B];
Scope and methodology: Scope: Global and U.S. financial services
industry and employment;
Scope and methodology: Methodology:
Surveys major financial services firms and applies estimates of the
value of planned offshoring to industry costs and employment. Uses an
estimate of U.S. financial services labor based on the industry size in
Germany;
Note: Deloitte provides consulting services to companies;
Findings: In the financial services sector, 850,000 jobs may move
offshore (15 percent of industry employment).

Source: Forrester Research[C];
Scope and methodology: Scope: Examines 18 different occupational
categories in the services sector of the U.S. economy;
Scope and methodology: Methodology: Ranks each occupation by four
factors related to offshoring, then applies a growing percentage share
of jobs offshored (depending on the rank) for 2000, 2005, 2010, and
2015. Employment is based on 2000;
Note: Forrester provides consulting services to companies;
Findings: Across all services occupations, 3.3 million jobs are
projected to move offshore by 2015. About 600,000 jobs may be
offshored by 2005.

Source: Gartner, Inc.[D];
Scope and methodology: Scope: IT industry and employment (IT vendors,
IT services providers, and IT jobs within non-IT enterprises);
Scope and methodology: Methodology: Bases estimate on professional
discussions with IT suppliers and purchasers about their offshoring
plans and knowledge of industry. Uses Information Technology
Association of America estimate of 10.3 million IT practitioners in
the U.S. in 2003 as the employment base;
Note: Gartner provides consulting services to companies;
Findings: By the end of 2004, 500,000 IT jobs may be displaced. One
out of every 10 jobs within U.S.-based IT vendors and IT service
providers may move to emerging markets, as may 1 of every 20 IT jobs
within user enterprises (non-IT companies that employ IT workers).

Source: Goldman Sachs[E];
Scope and methodology: Scope: Examines both services and manufacturing
industry offshoring;
Scope and methodology: Methodology: For services occupations, bases
estimates of offshoring on two approaches: 1) estimated the share of
jobs that could be relocated abroad on a sector-by-sector basis, based
on conversations with industry experts and 2) estimated the share of
each occupation that could be offshored;
Note: Goldman Sachs provides consulting services to companies;
Findings: Estimates that U.S. producers have cumulatively moved fewer
than 200,000 jobs to overseas affiliates but could increase the number
of jobs overseas to a few hundred thousand per year over the next 2 to
3 years. Up to six million jobs could be affected by offshoring over
the next decade.

Source: Global Insight, Inc.[F];
Scope and methodology: Scope: Examines offshoring in IT sector only
(software and other IT services), but estimates economywide effects;
Scope and methodology: Methodology: Forecasts 2004 to 2008 based on an
assumed 40 percent savings to baseline cost associated with IT software
and service offshore outsourcing. Model forecasts the economy with
offshore outsourcing and without to compare the impact on key
variables;
Note: The Information Technology Association of America, a business
group, funded the study. Global Insight provides consulting services
to companies;
Findings: About 104,000 of the 372,000 IT jobs were lost from 2000 to
2003 owing to offshoring (or 2.8 percent of total core IT jobs in
2000). After initial higher unemployment (2000 to 2002) primarily due
to displaced IT jobs, net employment rebounded with jobs being created
in both the IT sector (though more slowly than if there were no
offshoring) and in other sectors of the economy. Other effects include
higher real earnings (due to lower inflation and higher productivity),
increased spending on IT (diffusion through the economy), higher gross
domestic product, and increased exports.

Source: McKinsey Consulting[G];
Scope and methodology: Scope: Focuses
on IT and Business Process Offshoring (BPO) costs;
Scope and methodology: Methodology: Case
study of BPO in India. Estimates costs and cost savings for steps in a
re-engineered business process. Case study may not be representative of
other offshoring cases;
Note: McKinsey Consulting provides consulting services to companies;
Findings: Of the $1.45 to $1.47 of value created globally by offshoring
$1.00 of U.S. labor costs, the United States captures $1.12 to $1.14,
while receiving countries capture about $0.33. This effect is due to
new revenue (U.S. exports), repatriated earnings, and redeployed labor.

Source: GAO presentation of information from private sector studies.

[A] Bardhan and Kroll, "The New Wave of Outsourcing," (University of
California, Berkeley, Fall 2003).

[B] Deloitte Research, "The Cusp of a Revolution: How Offshoring Will
Transform the Financial Services Industry" (2003).

[C] Forrester Research,"3.3 Million U.S. Services Jobs to Go Offshore"
by John McCarthy (Nov. 11, 2002).

[D] Gartner, "U.S. Offshore Outsourcing: Structural Changes, Big
Impact" by Diane Morello (July 15, 2003).

[E] Goldman Sachs, "Offshoring: Where Have All The Jobs Gone?" (Sept.
19, 2003).

[F] Global Insight, "The Impact of Offshore IT Software and Services
Outsourcing on the U.S. Economy and the IT Industry" (March 2004).

[G] McKinsey Consulting, "Offshoring: Is It a Win-Win Game?" (August
2003).

[End of table]

Other Researchers Seek to Identify Additional Effects on the U.S.
Economy:

Some studies have attempted to further identify and, to some extent,
quantify the impacts of offshoring beyond the potential number of jobs
lost in particular occupations. For example, an Institute for
International Economics study[Footnote 52] argues that data on
productivity are likely to be positively affected in industries that
are now able to afford IT services that are relatively less expensive
because of offshoring. The study compares services offshoring to the
increased use of information technology hardware and the resulting
productivity improvements by a range of industries during the 1990s due
to falling prices from cheaper imports. Similarly, a study by the
economic consulting firm Global Insights uses a macro-economic model to
produce data estimates on productivity benefits, as well as other
potential effects on the economy due to offshoring.[Footnote 53]
Assuming that offshoring leads to lower prices for information
technology services, the study predicts that by 2008 offshoring will
lead to lower inflationary pressures and, therefore, to lower interest
rates and borrowing costs and ultimately a higher gross domestic
product of more than $100 billion (an increase of more than 0.1 percent
over estimated growth without offshoring).

Like other federal statistics discussed above, data on productivity,
prices, and growth would capture these effects, but it may be difficult
to differentiate the effects of offshoring from other economic
phenomena occurring simultaneously. In addition, the magnitude of these
effects may be limited. As discussed in the background section, annual
U.S. imports of services only account for about 3 percent of total U.S.
consumption of services, and offshored services comprise only a subset
of total services imports.

Other researchers argue that the effects of offshoring may show up in
data on the distribution of earnings among workers. For example, a
study by the Brookings Institution[Footnote 54] argues that offshoring
may impact the compensation of different types of workers over the
longer term, rather than on the overall level of employment in the
United States, as well as affecting the share of returns that go to
profits rather than workers. Similarly, Dani Rodrik of Harvard
University has argued that in a global economy, international trade
generally increases the size of the labor pool companies can draw upon
to produce their products. Although this increased competition among
laborers may not always result in direct job losses, it can place
downward pressure on wages as businesses use the threat of relocation
to affect the bargaining position of workers. Therefore, workers in
occupations that face greater labor market competition from abroad may
experience stagnant or declining wages and other compensation, relative
to other workers.[Footnote 55] These studies suggest that data on
these types of distributional effects are important to examine, since
the direct impact of offshoring on labor and other economic variables
may be hard to capture or distinguish from other factors that affect
the overall economy.

Observations:

Recent growth in offshoring has created an extensive debate about the
extent of this activity, as well as the advantages and disadvantages
for U.S. workers, U.S.-based firms, and for the U.S. economy as a
whole. The reasons for the rapid growth are relatively well understood
and have to do with information technology and the adoption of
offshoring as a business strategy. On the other hand, less is known
about the specific extent of offshoring to date. Federal statistics
provide some clues as to the extent of this activity and show that
relative to imports of other services, offshoring is a small but
growing trend in the U.S. economy. Private sector researchers have
provided additional information in the form of forecasts as a result of
the high level of interest in this activity.

However, a more complete understanding of the extent of this phenomenon
will require further efforts. Discussion of this issue is similar in
many ways to prior discussions of other significant changes that
inevitably occur in a dynamic economy. In these cases, federal
statisticians and other researchers attempt to use and modify existing
series and develop new measures to provide insight into the
phenomena.[Footnote 56] As more recent data are collected and
additional studies are completed, some questions about the extent of
the offshoring phenomenon will be addressed.

Finally, the policy consequences of this change are an important
component of this debate. Policymakers, analysts, and others inside and
outside the government combine those statistics with theory and models
of the economy to define the indirect and longer-term implications of
the particular changes that are of policy interest. To some extent, the
policy decisions are dependent upon the results of the ongoing research
on the extent of the activity and a better understanding of the
indirect effects of this activity on the U.S. workforce and the
economy. This research will also help address questions as to the
potential policy measures that might have some effect on this activity
and that might enhance the advantages or reduce the disadvantages. This
study, which focuses on the data that are available on the phenomenon
of offshoring, is just one component in this evolving discussion.

Agency Comments and Our Evaluation:

We provided a draft of this report to the Departments of Commerce and
Labor, the General Services Administration, and the Office of
Management and Budget. Representatives of Labor, the General Services
Administration, and the Office of Management and Budget indicated that
they did not have comments. We received written comments from Commerce,
which generally agreed with our observations. (See app. V.) Commerce
and Labor provided technical comments, which we incorporated in the
report as appropriate.

In her response to our draft report, the Under Secretary for Economics
Affairs at the Department of Commerce stated that Commerce's
statistical agencies are committed to refining their understanding of
the issues surrounding offshoring. She noted that "disentangling the
causes and effects of changes in production, employment, and incomes
involves not simply added data collection but [also] complex
analysis…." She characterized this report as a useful reference and
suggested that we add a discussion of "inshoring." We clarified this
point by adding the specific characterization of "inshoring" to our
discussion in the report of U.S. net exports of services abroad.

As agreed with your offices, we are sending copies of this report to
interested congressional committees, the Departments of Commerce and
Labor, the General Services Administration, and the Office of
Management and Budget. Copies will be made available to others on
request. In addition, the report will be available at no charge on the
GAO Web site at [Hyperlink, http://www.gao.gov].

If you or your staff have any questions about this report, please
contact Mr. Yager on (202) 512-4128. Other GAO contacts and staff
acknowledgments are listed in appendix VI.

Signed by:

Loren Yager:
Director, International Affairs and Trade:

Randolph C. Hite:
Director, Information Technology Architecture and Systems Issues:

Sigurd R. Nilsen:
Director, Education, Workforce, and Income Security Issues:

[End of section]

Appendixes:

Appendix I: Scope and Methodology:

We were asked to (1) describe the nature of the offshoring of IT and
other services, (2) discuss what the data show about the extent of this
practice, and (3) discuss what available data show about the effects of
services offshoring on the U.S. economy, including labor and business.

To obtain information about the nature of offshoring sourcing of
services, we reviewed available research studies, attended several
conferences on the subject, interviewed high-level government
representatives at the Departments of Commerce, Labor, and State; the
Office of the U.S. Trade Representative (USTR); the General Services
Administration (GSA) and the Office of Management and Budget (OMB). We
interviewed representatives at several private sector associations
representing business and labor interests. We also met with experts who
have published on the offshoring phenomenon, and we interviewed
representatives of several research organizations that provide
industry-wide studies and data. To identify technical factors that
encourage offshoring of information technology (IT) and other services
and potential business benefits and risks associated with this
offshoring technique, we performed a literature search and obtained
information from private research firms, such as the Brookings
Institution, Gartner, Inc., Meta Group, Inc., McKinsey and Company,
Forrester Research, Inc., Yankee Group, and Aberdeen Group. In general,
these sources provided consistent information regarding technical
advances and potential business benefits and risks associated with
offshoring. We determined that the data were sufficiently reliable for
the descriptive purposes of the report. We also interviewed
organizations representing IT services businesses and workers,
including the Information Technology Association of America; India's IT
services and software chamber of commerce, the National Association of
Software and Service Companies; the Institute of Electrical and
Electronics Engineers, Inc; American Federation of Labor-Congress of
Industrial Organizations; and the Washington Alliance of Technology
Workers/Communications Workers of America.

To obtain information about the extent of services offshoring, we
examined U.S. government data on international trade and foreign
investment from the Bureau of Economic Analysis (BEA). We reviewed
technical notes in BEA publications and related documentation to assess
limitations and the reliability of various data series and discussed
these topics with officials at BEA. We also reviewed available research
studies, attended a conference on these data, interviewed persons in
the private sector familiar with these data, and surveyed the available
literature on the subject. We determined that the data were
sufficiently reliable for the purposes of this report.

To identify trends in offshore sourcing of IT and other services
contract work by the federal government over the past 5 years, we
obtained data from the General Services Administration's Federal
Procurement Data System (FPDS) on the federal government's procurement
of IT and other services for fiscal year 1999 through fiscal year
2003.[Footnote 57] To assess the reliability of the FPDS data fields
required for this engagement, we performed electronic tests for obvious
errors in completeness and accuracy (e.g., we tested for completeness
by checking for missing data in key fields dealing with products and
services, place of performance, and country of manufacture and found
one percent or less missing in all cases). We also discussed the
reliability of FPDS data with GSA officials. We determined that the
relevant fields were sufficiently reliable for the comparative purposes
of this report. Using FPDS data, we calculated for each fiscal year in
the 5-year period (1) the total dollar value of IT and other services
contracting actions in which an agency reported a foreign country as
the principal place of performance or manufacture and (2) the
percentage of total dollars associated with foreign performance or
manufacture locations relative to the total dollar value of all
services contracts performed in all locations (U.S. and foreign
countries). All FPDS data cited in the report were adjusted for
inflation and represent constant fiscal year 2003 dollars.

To identify trends in offshore sourcing of IT and other services by
state governments, we contacted the following organizations to request
data on states' use of offshore sources:

* Gartner, Inc.

* National Association of State Chief Information Officers:

* National Conference of State Legislatures:

* National Association of State Procurement Officers:

* National Governors Association:

* National Center for Policy Analysis:

* National Association of Counties:

* Washington Alliance of Technology Workers/Communications Workers of
America:

* American Federation of Labor-Congress of Industrial Organizations:

Although none of these organizations could provide or were aware of any
comprehensive data, we obtained anecdotal accounts and some limited
data on contract awards by specific states in which all or part of the
work was being performed in foreign countries. We did not independently
verify this information.

To determine the effects of services offshoring on the U.S. economy, we
examined available federal data as well as private sector studies on
offshoring. To determine the effects on the U.S. workforce, we analyzed
available U.S. government employment data from the Bureau of Labor
Statistics (BLS), including some unpublished data. We cross-checked
various employment data and reviewed technical notes in BLS
publications to assess data limitations and the reliability of various
data series. We compared changes in employment from March through the
end of 2003 using the comprehensive Quarterly Census of Employment and
Wages (QCEW) and the more timely sample-based Current Employment
Statistics (CES) programs. These comparisons showed some divergence in
magnitude and direction of change for detailed services industries
associated with offshoring. Because the latest QCEW data are available
for December 2003, we were unable to determine the extent to which the
divergence might affect the March 2001 to June 2004 comparisons
discussed in this report. (CES data for March 2003 to March 2004 will
be revised to incorporate QCEW data in February 2005.) We also
discussed the limitations and reliability of these data with officials
at BLS and state employment agencies responsible for collecting them.
We determined that these data were sufficiently reliable for the
purposes of this report. We also reviewed available research studies,
attended several conferences on the subject, and interviewed
representatives of private sector associations representing business
and labor interests. We also met with experts, interviewed
representatives of research organizations that produced industrywide
studies and data, and surveyed the available literature on the subject.
With regard to private sector studies on the effects of offshoring, we
are reporting these studies and their results primarily for descriptive
purposes since limited information about offshoring is available.
Although we discuss some of the methodological limitations of these
studies, we did not assess the studies' overall validity, accuracy, or
reliability.

We conducted our review from January to August 2004 in accordance with
generally accepted government auditing standards.

[End of section]

Appendix II: Definitions of Offshoring:

No commonly accepted definition of offshoring currently exists, and the
term has been used in the literature on the subject to include a wide
range of business activities. Generally, offshoring is used to describe
a business's (or a government's) decision to replace domestically
supplied service functions with imported services produced offshore.
This definition focuses on a business's sourcing decision--should it
produce the services internally, source them domestically, or source
them from offshore? The imported services can include a wide range of
functions, such as computer programming, payroll and accounting, and
customer call centers.[Footnote 58] When a business replaces services
it had produced internally (or had sourced from a domestic supplier)
with imported services, those services and the domestic jobs associated
with them are said to have been "offshored."

Offshoring, though, has also (though less frequently) been used to
describe the movement of domestic production (and the related jobs)
offshore. In this case, the definition focuses not on imports of
services from abroad, but on U.S. companies investing offshore. The
services that companies produce offshore may be used to supply imports
to the U.S. market or to supply foreign markets. Companies may decide
to invest abroad for a variety of reasons, such as accessing foreign
markets, reducing their production costs, or utilizing foreign labor
and expertise.

In either case, whether focusing on the use of imported services or on
moving services production offshore through foreign investment,
definitions of offshoring frequently define it in terms of the
displacement of U.S. production and employment. U.S. production and
employment are affected when U.S. producers replace services produced
domestically with imported services. Similarly, when U.S. producers
move production operations offshore, U.S. domestic production and
employees are affected. Figure 13 shows the complex range of business
activities that results from the intersection of imports, investment,
and displacement of production and employment. The business activities
captured by different definitions of offshoring may also be seen as
subsets of the broader concept of globalization, which involves
increasing interaction and interdependence among national product and
factor markets.

In the figure, the upper left oval represents imported services, the
upper right oval represents U.S. investment offshore in services
production, and the lower center oval represents U.S. production and
employment displaced for reasons including offshoring. The darkest
shaded regions (marked "A" and "B") are the business activities most
commonly associated with the term "offshoring." Region A represents
those imported services that directly replaced services (and therefore
jobs) previously produced domestically. Region B also represents
imported services that directly replaced domestically produced
services. However, the imports in region B are provided by the U.S.
company's offshore affiliate (either acquired or started through U.S.
direct investment abroad).

Regions C through F include other business activities that are
sometimes included in broader definitions of offshoring or are
difficult to distinguish from offshoring in U.S. federal government
statistics. For example, region C covers services imports from U.S.
companies' foreign affiliates that did not directly displace U.S.
employment. A company that decides to expand its operations by
producing some services offshore, but does not reduce its U.S.
workforce, would be included in this region. Whether or not this
constitutes offshoring depends on whether the displacement of U.S. jobs
is a factor in the definition of offshoring. Region D is similar to
region C, except that the imported services are supplied by an
unaffiliated company offshore (rather than a U.S. affiliate). Regions E
and F are captured in broad definitions of offshoring that focus on the
movement of services production offshore through investment, but don't
focus on this production returning to the United States in the form of
imports. Region F involves the case in which the offshore production
actually displaces U.S. exports in the foreign market. That is, the
product was previously produced in the United States and exported, but
now it is produced by a U.S. company offshore and sold offshore.

Figure 13: Offshoring Activities, Related Data Sources, and Employment
Impacts:

[See PDF for image]

[End of figure]

The term "offshoring" is sometimes used synonymously with the term
"outsourcing." However, outsourcing means acquiring services from an
outside (unaffiliated) company, which can be either another domestic
company or an offshore supplier. In contrast, a company can source
offshore services from either an unaffiliated foreign company (offshore
outsourcing) or by investing in a foreign affiliate (offshore in-house
sourcing). In the latter case, the services supplied by the company's
foreign affiliate would not be considered outsourcing since the company
has an ownership stake in both the U.S. and foreign operations. Figure
14 demonstrates the difference between outsourcing and offshoring.

Figure 14: Offshoring versus Outsourcing: a Company's Sourcing Options:

[See PDF for image]

[End of figure]

[End of section]

Appendix III: Data on U.S. Imports and Exports of Services and Their
Limitations:

Trade in services data are cross-border transactions between U.S.
residents and foreign residents and cover affiliated and unaffiliated
transactions. Affiliated transactions consist of intrafirm trade within
multinational companies--specifically, the trade between U.S. parent
companies and their foreign affiliates and between U.S. affiliates and
their foreign parent groups. Unaffiliated transactions are with
foreigners that neither own, nor are owned by, the U.S. party to the
transaction.

Cross-border trade in private services comprises five broad categories
used in U.S. International Transactions Accounts (ITAs)--travel,
passenger fares, "other transportation," royalties and license fees,
and "other private services." Other private services, the focus of this
report, include affiliated and unaffiliated services. The unaffiliated
services consist of six major categories: education; financial
services; insurance; telecommunications; business, professional, and
technical services; and other unaffiliated services.

Business, Professional, and Technical Services Trade in 2002:

Business, professional, and technical (BPT) services is further
subdivided into several categories of particular interest in
discussions of offshoring. Table 8 shows the value of unaffiliated U.S.
exports and imports of BPT categories for selected U.S. trade partners.
The United States maintained a trade surplus in categories of BPT
services in 2002. For example, U.S. exports were more than $3 billion
in computer and data processing services, compared with a little over
$1 billion in U.S. imports. Table 9 presents the relative shares among
these trade partners in exports and imports of BPT services.

Table 8: Unaffiliated Business, Professional, and Technical (BPT)
Services Exports and Imports by Selected Country, 2002:

Total (dollars in millions);
Computer and data processing: Exports: $3,004;
Computer and data processing: Imports: $1,057;
Database and other information: Exports: $2,426;
Database and other information: Imports: $236;
Research, development, and testing: Exports: $1,086;
Research, development, and testing: Imports: $1,040;
Management, consulting, and PR: Exports: $1,696;
Management, consulting, and PR: Imports: $1,188.

Destination country: Canada;
Computer and data processing: Exports: $420;
Computer and data processing: Imports: $758;
Database and other information: Exports: $352;
Database and other information: Imports: $23;
Research, development, and testing: Exports: $91;
Research, development, and testing: Imports: $129;
Management, consulting, and PR: Exports: $163;
Management, consulting, and PR: Imports: $224.

Destination country: France;
Computer and data processing: Exports: $113;
Computer and data processing: Imports: $16;
Database and other information: Exports: $69;
Database and other information: Imports: (D);
Research, development, and testing: Exports: $61;
Research, development, and testing: Imports: $30;
Management, consulting, and PR: Exports: $32;
Management, consulting, and PR: Imports: $19.

Destination country: Germany;
Computer and data processing: Exports: $163;
Computer and data processing: Imports: $16;
Database and other information: Exports: $77;
Database and other information: Imports: $7;
Research, development, and testing: Exports: $125;
Research, development, and testing: Imports: $98;
Management, consulting, and PR: Exports: $89;
Management, consulting, and PR: Imports: $121.

Destination country: Italy;
Computer and data processing: Exports: $64;
Computer and data processing: Imports: $3;
Database and other information: Exports: $136;
Database and other information: Imports: $1;
Research, development, and testing: Exports: $9;
Research, development, and testing: Imports: $16;
Management, consulting, and PR: Exports: $14;
Management, consulting, and PR: Imports: $17.

Destination country: United Kingdom;
Computer and data processing: Exports: $975;
Computer and data processing: Imports: $50;
Database and other information: Exports: $436;
Database and other information: Imports: $52;
Research, development, and testing: Exports: $149;
Research, development, and testing: Imports: $250;
Management, consulting, and PR: Exports: $131;
Management, consulting, and PR: Imports: $188.

Destination country: Brazil;
Computer and data processing: Exports: $53;
Computer and data processing: Imports: $2;
Database and other information: Exports: $100;
Database and other information: Imports: $1;
Research, development, and testing: Exports: $11;
Research, development, and testing: Imports: $7;
Management, consulting, and PR: Exports: $26;
Management, consulting, and PR: Imports: (D).

Destination country: Saudi Arabia;
Computer and data processing: Exports: $41;
Computer and data processing: Imports: (*);
Database and other information: Exports: $61;
Database and other information: Imports: (*);
Research, development, and testing: Exports: $12;
Research, development, and testing: Imports: (*);
Management, consulting, and PR: Exports: $108;
Management, consulting, and PR: Imports: $36.

Destination country: Australia;
Computer and data processing: Exports: $85;
Computer and data processing: Imports: $3;
Database and other information: Exports: $116;
Database and other information: Imports: $1;
Research, development, and testing: Exports: $13;
Research, development, and testing: Imports: $12;
Management, consulting, and PR: Exports: $12;
Management, consulting, and PR: Imports: $8.

Destination country: India;
Computer and data processing: Exports: $13;
Computer and data processing: Imports: $76;
Database and other information: Exports: $51;
Database and other information: Imports: $4;
Research, development, and testing: Exports: $4;
Research, development, and testing: Imports: $19;
Management, consulting, and PR: Exports: $11;
Management, consulting, and PR: Imports: $12.

Destination country: Japan;
Computer and data processing: Exports: $185;
Computer and data processing: Imports: $10;
Database and other information: Exports: $88;
Database and other information: Imports: $17;
Research, development, and testing: Exports: $234;
Research, development, and testing: Imports: $96;
Management, consulting, and PR: Exports: $62;
Management, consulting, and PR: Imports: $137.

Destination country: Philippines;
Computer and data processing: Exports: $11;
Computer and data processing: Imports: $20;
Database and other information: Exports: $6;
Database and other information: Imports: $3;
Research, development, and testing: Exports: $2;
Research, development, and testing: Imports: $1;
Management, consulting, and PR: Exports: $17;
Management, consulting, and PR: Imports: $9.

Destination country: China;
Computer and data processing: Exports: $15;
Computer and data processing: Imports: $1;
Database and other information: Exports: $18;
Database and other information: Imports: $4;
Research, development, and testing: Exports: $12;
Research, development, and testing: Imports: $8;
Management, consulting, and PR: Exports: $13;
Management, consulting, and PR: Imports: $3.

Source: GAO analysis of Department of Commerce data.

(*) Less than $500,000:

(D) Suppressed to avoid disclosure of individual companies.

[End of table]

Table 9: Share of Total Unaffiliated Business, Professional, and
Technical (BPT) Services Exports and Imports by Selected Country,
2002:

Total percentage;
Computer and data processing: Exports: $100;
Computer and data processing: Imports: $100;
Database and other information: Exports: $100;
Database and other information: Imports: $100;
Research, development, and testing: Exports: $100;
Research, development, and testing: Imports: $100;
Management, consulting, and PR: Exports: $100;
Management, consulting, and PR: Imports: $100.

Destination country: Canada;
Computer and data processing: Exports: $14.0;
Computer and data processing: Imports: $71.7;
Database and other information: Exports: $14.5;
Database and other information: Imports: $9.7;
Research, development, and testing: Exports: $8.4;
Research, development, and testing: Imports: $12.4;
Management, consulting, and PR: Exports: $9.6;
Management, consulting, and PR: Imports: $18.9.

Destination country: France;
Computer and data processing: Exports: $3.8;
Computer and data processing: Imports: $1.5;
Database and other information: Exports: $2.8;
Database and other information: Imports: (D);
Research, development, and testing: Exports: $5.6;
Research, development, and testing: Imports: $2.9;
Management, consulting, and PR: Exports: $1.9;
Management, consulting, and PR: Imports: $1.6.

Destination country: Germany;
Computer and data processing: Exports: $5.4;
Computer and data processing: Imports: $1.5;
Database and other information: Exports: $3.2;
Database and other information: Imports: $3.0;
Research, development, and testing: Exports: $11.5;
Research, development, and testing: Imports: $9.4;
Management, consulting, and PR: Exports: $5.2;
Management, consulting, and PR: Imports: $10.2.

Destination country: Italy;
Computer and data processing: Exports: $2.1;
Computer and data processing: Imports: $0.3;
Database and other information: Exports: $5.6;
Database and other information: Imports: $0.4;
Research, development, and testing: Exports: $0.8;
Research, development, and testing: Imports: $1.5;
Management, consulting, and PR: Exports: $0.8;
Management, consulting, and PR: Imports: $1.4.

Destination country: United Kingdom;
Computer and data processing: Exports: $32.5;
Computer and data processing: Imports: $4.7;
Database and other information: Exports: $18.0;
Database and other information: Imports: $22.0;
Research, development, and testing: Exports: $13.7;
Research, development, and testing: Imports: $24.0;
Management, consulting, and PR: Exports: $7.7;
Management, consulting, and PR: Imports: $15.8.

Destination country: Brazil;
Computer and data processing: Exports: $1.8;
Computer and data processing: Imports: $0.2;
Database and other information: Exports: $4.1;
Database and other information: Imports: $0.4;
Research, development, and testing: Exports: $1.0;
Research, development, and testing: Imports: $0.7;
Management, consulting, and PR: Exports: $1.5;
Management, consulting, and PR: Imports: (D).

Destination country: Saudi Arabia;
Computer and data processing: Exports: $1.4;
Computer and data processing: Imports: (*);
Database and other information: Exports: $2.5;
Database and other information: Imports: (*);
Research, development, and testing: Exports: $1.1;
Research, development, and testing: Imports: (*);
Management, consulting, and PR: Exports: $6.4;
Management, consulting, and PR: Imports: $3.0.

Destination country: Australia;
Computer and data processing: Exports: $2.8;
Computer and data processing: Imports: $0.3;
Database and other information: Exports: $4.8;
Database and other information: Imports: $0.4;
Research, development, and testing: Exports: $1.2;
Research, development, and testing: Imports: $1.2;
Management, consulting, and PR: Exports: $0.7;
Management, consulting, and PR: Imports: $0.7.

Destination country: India;
Computer and data processing: Exports: $0.4;
Computer and data processing: Imports: $7.2;
Database and other information: Exports: $2.1;
Database and other information: Imports: $1.7;
Research, development, and testing: Exports: $0.4;
Research, development, and testing: Imports: $1.8;
Management, consulting, and PR: Exports: $0.6;
Management, consulting, and PR: Imports: $1.0.

Destination country: Japan;
Computer and data processing: Exports: $6.2;
Computer and data processing: Imports: $0.9;
Database and other information: Exports: $3.6;
Database and other information: Imports: $7.2;
Research, development, and testing: Exports: $21.5;
Research, development, and testing: Imports: $9.2;
Management, consulting, and PR: Exports: $3.7;
Management, consulting, and PR: Imports: $11.5.

Destination country: Philippines;
Computer and data processing: Exports: $0.4;
Computer and data processing: Imports: $1.9;
Database and other information: Exports: $0.2;
Database and other information: Imports: $1.3;
Research, development, and testing: Exports: $0.2;
Research, development, and testing: Imports: $0.1;
Management, consulting, and PR: Exports: $1.0;
Management, consulting, and PR: Imports: $0.8.

Destination country: China;
Computer and data processing: Exports: $0.5;
Computer and data processing: Imports: $0.1;
Database and other information: Exports: $0.7;
Database and other information: Imports: $1.7;
Research, development, and testing: Exports: $1.1;
Research, development, and testing: Imports: $0.8;
Management, consulting, and PR: Exports: $0.8;
Management, consulting, and PR: Imports: $0.3.

Source: GAO analysis of Department of Commerce data.

(*) Less than $500,000.

(D) Suppressed to avoid disclosure of individual companies.

[End of table]

Bureau of Economic Analysis Data Collection:

To prepare the estimates of other private services, the Bureau of
Economic Analysis (BEA) conducts benchmark and four annual surveys of
cross-border trade with unaffiliated foreigners that cover (1) selected
services (mainly miscellaneous business, professional, and technical
services), (2) construction, engineering, architectural, and mining
services, (3) insurance, and (4) financial services. Beginning in 2004,
BEA began the collection of quarterly data that cover services for
which data previously were collected annually. These services include
detail of business, professional, and technical services, such as
computer and data processing and legal and operational leasing
services; financial and insurance services; and telecommunication
services.

Separate surveys are conducted by BEA to collect cross-border trade
with affiliated foreigners. Quarterly data are collected on all other
private services; annual and benchmark data are collected (usually
about every 4 to 5 years) for insurance; financial; computer and
information; management and consulting; research, development, and
testing; and other services.[Footnote 59]

Data Limitations and Reliability:

Quarterly estimates of other private services are released about 75
days after the end of the reference quarter as part of the U.S.
International Transactions Accounts.[Footnote 60] These estimates
consist of six types of services for transactions with unaffiliated
foreigners and a single estimate for transactions with affiliated
foreigners. These estimates are subject to revision 90 days later and
each June, as part of historical ITA revisions. The initial quarterly
estimates of services transactions with unaffiliated foreigners are
based on past trends, supplemented with data from other sources. The
initial estimates of services transactions with affiliated foreigners
are based on quarterly BEA surveys. In the first June revision, annual
estimates for the past year are revised to reflect preliminary results
of (1) an annual survey of transactions with unaffiliated foreigners
and (2) annual data on transactions with affiliated foreigners. In the
following June revision, more complete survey results are incorporated.
However, the detailed types of services for transactions with both
unaffiliated and affiliated foreigners, as well as country data, are
not released until October of each year. For example, the latest year
for which we had annual survey-based detail was 2002.

In addition to the lack of quarterly survey data for unaffiliated
transactions and lack of quarterly product detail for affiliated
services, there are reliability issues related to the mandatory filing
requirements and survey coverage. Under regulations[Footnote 61]
implementing the International Investment and Trade in Services Survey
Act,[Footnote 62] U.S. persons and intermediaries are required to
furnish reports that are necessary to carry out BEA surveys and studies
provided for by the Act.[Footnote 63] Reporting annual transactions
with unaffiliated foreigners is required for transactions of over $1
million in any one kind of service; the same size transaction is used
for the benchmark survey. Respondents whose transactions fall below
this level must report the total level of transactions in all services.
For transactions with affiliated foreigners, the limitations are
expressed in terms of the size of the affiliate. Quarterly and annual
reporting are required only for affiliates whose total assets, sales,
or net income exceed $30 million. Although the services surveys are
mandatory, the mailing list BEA uses is constructed from publicly
available information and not from a comprehensive business register
such as those used by BLS and the Census Bureau for their surveys.
Consequently it is likely that BEA's coverage of small or new firms is
limited.[Footnote 64] Finally, for transactions between affiliated
firms, there are questions about the reliability of the prices used to
value these intrafirm transfers.

A standard method for measuring data reliability is to compare initial
estimates with subsequent revised estimates. This approach assumes that
estimates based on benchmark surveys are more reliable than estimates
based on annual estimates that, in turn, are more reliable than
estimates based on quarterly surveys. Thus, for the ITAs, preliminary
quarterly estimates are released about 75 days after the end of the
reference quarter and a "first revision" to these estimates occurs 90
days later. The following June, a historical revision is completed.
These historical revisions usually cover the preceding 4 years and
reflect the incorporation of more reliable source data, such as more
complete or new survey data, as well as changes in definitions, data
sources, and estimating procedures.

In accordance with the requirements of OMB's Statistical Policy
Directive Number 3, "Statistical Policy Directive on Compilation,
Release, and Evaluation of Principal Federal Economic Indicators," BEA
recently prepared a report evaluating the accuracy of the ITAs. This
evaluation, which covered the period from first quarter of 1999 to the
fourth quarter of 2001, reported that large changes were made to the
preliminary and first revised quarterly estimates with the release of
historical revisions. However, the revision also reported that the
changes primarily reflected major improvements to the accounts that
were concentrated in the services and income accounts. According to
BEA, "This study provides support for the observations that only
relatively small revisions are made to the accounts in the 90 days
following publication of the initial estimates, and that more sizable
changes occur at the time of the first June estimate." For example, the
report cited the incorporation of BEA's benchmark surveys of services
as a major source of historical revision.

[End of section]

Appendix IV: Data on U.S. Direct Investment Abroad, Multinational
Company Operations, and their Limitations:

The U.S. Bureau of Economic Analysis (BEA) collects data on an annual
basis from U.S. multinational companies (MNCs). The data provide detail
on U.S. foreign direct investment (FDI) abroad and the operations of
U.S. multinational companies and their majority and minority-owned
affiliates (e.g., assets, sales and purchases, employment). Table 10
presents information on U.S. FDI across countries for 2002. It also
provides the growth rate of this investment from 1999 to 2002 and the
share of investment in the manufacturing; information; and
professional, scientific, and technical industries.[Footnote 65]

Table 10: U.S. Foreign Direct Investment (FDI) Abroad, 2002; Share by
Country, 2002; Change from 1999; and Share by Industry, 2002:

All Countries:
U.S. FDI 2002, (billions U.S. dollars): $1,521;
Share of total U.S. FDI, 2002: 100.00%;
Percentage change 1999-2002: 25%;
Share in manufacturing: 26%;
Share in information: 4%;
Share in professional, scientific, and technical: 3%.

Canada;
U.S. FDI 2002, (billions U.S. dollars): $153;
Share of total U.S. FDI, 2002: 10.03%;
Percentage change 1999-2002: 28%;
Share in manufacturing: 44%;
Share in information: 1%;
Share in professional, scientific, and technical: 1%.

Europe;
U.S. FDI 2002, (billions U.S. dollars): $797;
Share of total U.S. FDI, 2002: 52.4%;
Percentage change 1999-2002: 27%;
Share in manufacturing: 25%;
Share in information: 5%;
Share in professional, scientific, and technical: 2%.

Europe: Austria;
U.S. FDI 2002, (billions U.S. dollars): $4;
Share of total U.S. FDI, 2002: 0.26%;
Percentage change 1999-2002: 4%;
Share in manufacturing: 44%;
Share in information: [B];
Share in professional, scientific, and technical: 7%.

Europe: Belgium;
U.S. FDI 2002, (billions U.S. dollars): $24;
Share of total U.S. FDI, 2002: 1.59%;
Percentage change 1999-2002: 11%;
Share in manufacturing: 36%;
Share in information: 4%;
Share in professional, scientific, and technical: 9%.

Europe: Czech Republic;
U.S. FDI 2002, (billions U.S. dollars): $1;
Share of total U.S. FDI, 2002: 0.09%;
Percentage change 1999-2002: 30%;
Share in manufacturing: 49%;
Share in information: [C];
Share in professional, scientific, and technical: 4%.

Europe: Denmark;
U.S. FDI 2002, (billions U.S. dollars): $8;
Share of total U.S. FDI, 2002: 0.51%;
Percentage change 1999-2002: 100%;
Share in manufacturing: 30%;
Share in information: 3%;
Share in professional, scientific, and technical: 2%.

Europe: Finland;
U.S. FDI 2002, (billions U.S. dollars): $1;
Share of total U.S. FDI, 2002: 0.09%;
Percentage change 1999-2002: 1%;
Share in manufacturing: 56%;
Share in information: 1%;
Share in professional, scientific, and technical: 6%.

Europe: France;
U.S. FDI 2002, (billions U.S. dollars): $44;
Share of total U.S. FDI, 2002: 2.89%;
Percentage change 1999-2002: 2%;
Share in manufacturing: 47%;
Share in information: 1%;
Share in professional, scientific, and technical: 3%.

Europe: Germany;
U.S. FDI 2002, (billions U.S. dollars): $65;
Share of total U.S. FDI, 2002: 4.26%;
Percentage change 1999-2002: 21%;
Share in manufacturing: 43%;
Share in information: 4%;
Share in professional, scientific, and technical: 3%.

Europe: Greece;
U.S. FDI 2002, (billions U.S. dollars): $1;
Share of total U.S. FDI, 2002: 0.07%;
Percentage change 1999-2002: 39%;
Share in manufacturing: 17%;
Share in information: 3%;
Share in professional, scientific, and technical: [C].

Europe: Hungary;
U.S. FDI 2002, (billions U.S. dollars): $2;
Share of total U.S. FDI, 2002: 0.16%;
Percentage change 1999-2002: 2%;
Share in manufacturing: 68%;
Share in information: 1%;
Share in professional, scientific, and technical: 3%.

Europe: Ireland;
U.S. FDI 2002, (billions U.S. dollars): $42;
Share of total U.S. FDI, 2002: 2.74%;
Percentage change 1999-2002: 66%;
Share in manufacturing: 32%;
Share in information: 16%;
Share in professional, scientific, and technical: [C].

Europe: Italy;
U.S. FDI 2002, (billions U.S. dollars): $28;
Share of total U.S. FDI, 2002: 1.87%;
Percentage change 1999-2002: 59%;
Share in manufacturing: 60%;
Share in information: 7%;
Share in professional, scientific, and technical: 2%.

Europe: Luxembourg;
U.S. FDI 2002, (billions U.S. dollars): $36;
Share of total U.S. FDI, 2002: 2.35%;
Percentage change 1999-2002: 61%;
Share in manufacturing: 8%;
Share in information: 0%;
Share in professional, scientific, and technical: 0%.

Europe: Netherlands;
U.S. FDI 2002, (billions U.S. dollars): $145;
Share of total U.S. FDI, 2002: 9.56%;
Percentage change 1999-2002: 20%;
Share in manufacturing: 18%;
Share in information: 2%;
Share in professional, scientific, and technical: 1%.

Europe: Norway;
U.S. FDI 2002, (billions U.S. dollars): $7;
Share of total U.S. FDI, 2002: 0.48%;
Percentage change 1999-2002: 24%;
Share in manufacturing: 10%;
Share in information: 1%;
Share in professional, scientific, and technical: 1%.

Europe: Poland;
U.S. FDI 2002, (billions U.S. dollars): $5;
Share of total U.S. FDI, 2002: 0.31%;
Percentage change 1999-2002: 45%;
Share in manufacturing: 54%;
Share in information: 6%;
Share in professional, scientific, and technical: 1%.

Europe: Portugal;
U.S. FDI 2002, (billions U.S. dollars): $3;
Share of total U.S. FDI, 2002: 0.22%;
Percentage change 1999-2002: 55%;
Share in manufacturing: 23%;
Share in information: 10%;
Share in professional, scientific, and technical: 1%.

Europe: Russia;
U.S. FDI 2002, (billions U.S. dollars): $1;
Share of total U.S. FDI, 2002: 0.04%;
Percentage change 1999-2002: -63%;
Share in manufacturing: 14%;
Share in information: 23%;
Share in professional, scientific, and technical: 3%.

Europe: Spain;
U.S. FDI 2002, (billions U.S. dollars): $24;
Share of total U.S. FDI, 2002: 1.57%;
Percentage change 1999-2002: 20%;
Share in manufacturing: 30%;
Share in information: 2%;
Share in professional, scientific, and technical: 1%.

Europe: Sweden;
U.S. FDI 2002, (billions U.S. dollars): $19;
Share of total U.S. FDI, 2002: 1.25%;
Percentage change 1999-2002: 79%;
Share in manufacturing: 60%;
Share in information: 2%;
Share in professional, scientific, and technical: 1%.

Europe: Switzerland;
U.S. FDI 2002, (billions U.S. dollars): $70;
Share of total U.S. FDI, 2002: 4.61%;
Percentage change 1999-2002: 73%;
Share in manufacturing: 8%;
Share in information: [B];
Share in professional, scientific, and technical: 1%.

Europe: Turkey;
U.S. FDI 2002, (billions U.S. dollars): $2;
Share of total U.S. FDI, 2002: 0.12%;
Percentage change 1999-2002: 5%;
Share in manufacturing: 38%;
Share in information: 1%;
Share in professional, scientific, and technical: 1%.

Europe: United Kingdom;
U.S. FDI 2002, (billions U.S. dollars): $255;
Share of total U.S. FDI, 2002: 16.79%;
Percentage change 1999-2002: 18%;
Share in manufacturing: 19%;
Share in information: 8%;
Share in professional, scientific, and technical: [C].

Europe: Other;
U.S. FDI 2002, (billions U.S. dollars): $8;
Share of total U.S. FDI, 2002: 0.56%;
Percentage change 1999-2002: 20%;
Share in manufacturing: 6%;
Share in information: [C];
Share in professional, scientific, and technical: 7%.

Latin America and other Western Hemisphere;
U.S. FDI 2002, (billions U.S. dollars): $272;
Share of total U.S. FDI, 2002: 17.91%;
Percentage change 1999-2002: 7%;
Share in manufacturing: 17%;
Share in information: 2%;
Share in professional, scientific, and technical: 1%.

Latin America and other Western Hemisphere: South America;
U.S. FDI 2002, (billions U.S. dollars): $75;
Share of total U.S. FDI, 2002: 4.91%;
Percentage change 1999-2002: - 11%;
Share in manufacturing: 29%;
Share in information: 5%;
Share in professional, scientific, and technical: 3%.

Latin America and other Western Hemisphere: South America: Argentina;
U.S. FDI 2002, (billions U.S. dollars): $11;
Share of total U.S. FDI, 2002: 0.74%;
Percentage change 1999-2002: -40%;
Share in manufacturing: 16%;
Share in information: 1%;
Share in professional, scientific, and technical: 1%.

Latin America and other Western Hemisphere: South America: Brazil;
U.S. FDI 2002, (billions U.S. dollars): $32;
Share of total U.S. FDI, 2002: 2.09%;
Percentage change 1999-2002: -15%;
Share in manufacturing: 44%;
Share in information: 2%;
Share in professional, scientific, and technical: 4%.

Latin America and other Western Hemisphere: South America: Chile;
U.S. FDI 2002, (billions U.S. dollars): $12;
Share of total U.S. FDI, 2002: 0.76%;
Percentage change 1999-2002: 14%;
Share in manufacturing: 16%;
Share in information: 4%;
Share in professional, scientific, and technical: 0%.

Latin America and other Western Hemisphere: South America: Colombia;
U.S. FDI 2002, (billions U.S. dollars): $4;
Share of total U.S. FDI, 2002: 0.25%;
Percentage change 1999-2002: -1%;
Share in manufacturing: 33%;
Share in information: [C];
Share in professional, scientific, and technical: 1%.

Latin America and other Western Hemisphere: South America: Ecuador;
U.S. FDI 2002, (billions U.S. dollars): $1;
Share of total U.S. FDI, 2002: 0.07%;
Percentage change 1999-2002: -3%;
Share in manufacturing: 9%;
Share in information: [C];
Share in professional, scientific, and technical: 0%.

Latin America and other Western Hemisphere: South America: Peru;
U.S. FDI 2002, (billions U.S. dollars): $3;
Share of total U.S. FDI, 2002: 0.21%;
Percentage change 1999-2002: 3%;
Share in manufacturing: 4%;
Share in information: 1%;
Share in professional, scientific, and technical: 1%.

Latin America and other Western Hemisphere: South America: Venezuela;
U.S. FDI 2002, (billions U.S. dollars): $11;
Share of total U.S. FDI, 2002: 0.71%;
Percentage change 1999-2002: 46%;
Share in manufacturing: 21%;
Share in information: [C];
Share in professional, scientific, and technical: 8%.

Latin America and other Western Hemisphere: South America: Other;
U.S. FDI 2002, (billions U.S. dollars): $1;
Share of total U.S. FDI, 2002: 0.08%;
Percentage change 1999-2002: -36%;
Share in manufacturing: 18%;
Share in information: 9%;
Share in professional, scientific, and technical: 1%.

Latin America and other Western Hemisphere: Central America;
U.S. FDI 2002, (billions U.S. dollars): $81;
Share of total U.S. FDI, 2002: 5.34%;
Percentage change 1999-2002: 10%;
Share in manufacturing: 25%;
Share in information: 2%;
Share in professional, scientific, and technical: 1%.

Latin America and other Western Hemisphere: Central America: Costa
Rica;
U.S. FDI 2002, (billions U.S. dollars): $2;
Share of total U.S. FDI, 2002: 0.11%;
Percentage change 1999-2002: 7%;
Share in manufacturing: [C];
Share in information: [C];
Share in professional, scientific, and technical: 2%.

Latin America and other Western Hemisphere: Central America: Honduras;
U.S. FDI 2002, (billions U.S. dollars): $a;
Share of total U.S. FDI, 2002: 0.01%;
Percentage change 1999-2002: -47%;
Share in manufacturing: 97%;
Share in information: [C];
Share in professional, scientific, and technical: 0%.

Latin America and other Western Hemisphere: Central America: Mexico;
U.S. FDI 2002, (billions U.S. dollars): $58;
Share of total U.S. FDI, 2002: 3.82%;
Percentage change 1999-2002: 56%;
Share in manufacturing: 33%;
Share in information: [C];
Share in professional, scientific, and technical: 1%.

Latin America and other Western Hemisphere: Central America: Panama;
U.S. FDI 2002, (billions U.S. dollars): $20;
Share of total U.S. FDI, 2002: 1.32%;
Percentage change 1999-2002: -40%;
Share in manufacturing: [C];
Share in information: [C];
Share in professional, scientific, and technical: 0%.

Latin America and other Western Hemisphere: Central America: Other;
U.S. FDI 2002, (billions U.S. dollars): $1;
Share of total U.S. FDI, 2002: 0.09%;
Percentage change 1999-2002: 5%;
Share in manufacturing: 34%;
Share in information: [C];
Share in professional, scientific, and technical: 9%.

Other Western Hemisphere;
U.S. FDI 2002, (billions U.S. dollars): $117;
Share of total U.S. FDI, 2002: 7.66%;
Percentage change 1999-2002: 20%;
Share in manufacturing: 4%;
Share in information: 1%;
Share in professional, scientific, and technical: 0%.

Latin America and other Western Hemisphere: Other Western Hemisphere:
Barbados;
U.S. FDI 2002, (billions U.S. dollars): $1;
Share of total U.S. FDI, 2002: 0.1%;
Percentage change 1999-2002: -51%;
Share in manufacturing: 10%;
Share in information: [C];
Share in professional, scientific, and technical: [B].

Latin America and other Western Hemisphere: Other Western Hemisphere:
Bermuda;
U.S. FDI 2002, (billions U.S. dollars): $69;
Share of total U.S. FDI, 2002: 4.53%;
Percentage change 1999-2002: 35%;
Share in manufacturing: 0%;
Share in information: 0%;
Share in professional, scientific, and technical: 0%.

Latin America and other Western Hemisphere: Other Western Hemisphere:
Dominican Republic;
U.S. FDI 2002, (billions U.S. dollars): $1;
Share of total U.S. FDI, 2002: 0.07%;
Percentage change 1999-2002: 16%;
Share in manufacturing: 59%;
Share in information: 5%;
Share in professional, scientific, and technical: 0%.

Latin America and other Western Hemisphere: Other Western Hemisphere:
United Kingdom Islands, Caribbean;
U.S. FDI 2002, (billions U.S. dollars): $29;
Share of total U.S. FDI, 2002: 1.92%;
Percentage change 1999-2002: -2%;
Share in manufacturing: 3%;
Share in information: 1%;
Share in professional, scientific, and technical: 2%.

Latin America and other Western Hemisphere: Other Western Hemisphere:
Other;
U.S. FDI 2002, (billions U.S. dollars): $16;
Share of total U.S. FDI, 2002: 1.04%;
Percentage change 1999-2002: 30%;
Share in manufacturing: 19%;
Share in information: [C];
Share in professional, scientific, and technical: [B].

Africa;
U.S. FDI 2002, (billions U.S. dollars): $15;
Share of total U.S. FDI, 2002: 0.99%;
Percentage change 1999-2002: 15%;
Share in manufacturing: 8%;
Share in information: 6%;
Share in professional, scientific, and technical: 4%.

Africa: Egypt;
U.S. FDI 2002, (billions U.S. dollars): $3;
Share of total U.S. FDI, 2002: 0.19%;
Percentage change 1999-2002: 34%;
Share in manufacturing: [B];
Share in information: [C];
Share in professional, scientific, and technical: 0%.

Africa: Nigeria;
U.S. FDI 2002, (billions U.S. dollars): $2;
Share of total U.S. FDI, 2002: 0.12%;
Percentage change 1999-2002: 656%;
Share in manufacturing: 3%;
Share in information: 0%;
Share in professional, scientific, and technical: 0%.

Africa: South Africa;
U.S. FDI 2002, (billions U.S. dollars): $3;
Share of total U.S. FDI, 2002: 0.23%;
Percentage change 1999-2002: -1%;
Share in manufacturing: 35%;
Share in information: 28%;
Share in professional, scientific, and technical: [C].

Africa: Other;
U.S. FDI 2002, (billions U.S. dollars): $7;
Share of total U.S. FDI, 2002: 0.45%;
Percentage change 1999-2002: -4%;
Share in manufacturing: 5%;
Share in information: [C];
Share in professional, scientific, and technical: [C].

Africa: Middle East;
U.S. FDI 2002, (billions U.S. dollars): $14;
Share of total U.S. FDI, 2002: 0.93%;
Percentage change 1999-2002: 29%;
Share in manufacturing: 25%;
Share in information: 13%;
Share in professional, scientific, and technical: 7%.

Africa: Israel;
U.S. FDI 2002, (billions U.S. dollars): $5;
Share of total U.S. FDI, 2002: 0.34%;
Percentage change 1999-2002: 9%;
Share in manufacturing: 55%;
Share in information: [C];
Share in professional, scientific, and technical: 16%.

Africa: Saudi Arabia;
U.S. FDI 2002, (billions U.S. dollars): $4;
Share of total U.S. FDI, 2002: 0.24%;
Percentage change 1999-2002: 11%;
Share in manufacturing: [C];
Share in information: [C];
Share in professional, scientific, and technical: 4%.

Africa: United Arab Emirates;
U.S. FDI 2002, (billions U.S. dollars): $1;
Share of total U.S. FDI, 2002: 0.09%;
Percentage change 1999-2002: 159%;
Share in manufacturing: [C];
Share in information: 0%;
Share in professional, scientific, and technical: 3%.

Africa: Other;
U.S. FDI 2002, (billions U.S. dollars): $4;
Share of total U.S. FDI, 2002: 0.25%;
Percentage change 1999-2002: 68%;
Share in manufacturing: [C];
Share in information: 0%;
Share in professional, scientific, and technical: 0%.

Asia and Pacific;
U.S. FDI 2002, (billions U.S. dollars): $270;
Share of total U.S. FDI, 2002: 17.75%;
Percentage change 1999-2002: 42%;
Share in manufacturing: 27%;
Share in information: 2%;
Share in professional, scientific, and technical: 4%.

Asia and Pacific: Australia;
U.S. FDI 2002, (billions U.S. dollars): $36;
Share of total U.S. FDI, 2002: 2.39%;
Percentage change 1999-2002: 3%;
Share in manufacturing: 30%;
Share in information: 1%;
Share in professional, scientific, and technical: 3%.

Asia and Pacific: China;
U.S. FDI 2002, (billions U.S. dollars): $10;
Share of total U.S. FDI, 2002: 0.68%;
Percentage change 1999-2002: 9%;
Share in manufacturing: 60%;
Share in information: 1%;
Share in professional, scientific, and technical: 1%.

Asia and Pacific: Hong Kong;
U.S. FDI 2002, (billions U.S. dollars): $36;
Share of total U.S. FDI, 2002: 2.35%;
Percentage change 1999-2002: 57%;
Share in manufacturing: 8%;
Share in information: 1%;
Share in professional, scientific, and technical: 3%.

Asia and Pacific: India;
U.S. FDI 2002, (billions U.S. dollars): $4;
Share of total U.S. FDI, 2002: 0.24%;
Percentage change 1999-2002: 54%;
Share in manufacturing: 38%;
Share in information: b%;
Share in professional, scientific, and technical: 4%.

Asia and Pacific: Indonesia;
U.S. FDI 2002, (billions U.S. dollars): $8;
Share of total U.S. FDI, 2002: 0.5%;
Percentage change 1999-2002: -10%;
Share in manufacturing: 7%;
Share in information: b%;
Share in professional, scientific, and technical: 1%.

Asia and Pacific: Japan;
U.S. FDI 2002, (billions U.S. dollars): $66;
Share of total U.S. FDI, 2002: 4.32%;
Percentage change 1999-2002: 19%;
Share in manufacturing: 19%;
Share in information: 4%;
Share in professional, scientific, and technical: 12%.

Asia and Pacific: Korea, Republic of;
U.S. FDI 2002, (billions U.S. dollars): $12;
Share of total U.S. FDI, 2002: 0.8%;
Percentage change 1999-2002: 63%;
Share in manufacturing: 52%;
Share in information: 1%;
Share in professional, scientific, and technical: 4%.

Asia and Pacific: Malaysia;
U.S. FDI 2002, (billions U.S. dollars): $9;
Share of total U.S. FDI, 2002: 0.56%;
Percentage change 1999-2002: 38%;
Share in manufacturing: 70%;
Share in information: 2%;
Share in professional, scientific, and technical: [C].

Asia and Pacific: New Zealand;
U.S. FDI 2002, (billions U.S. dollars): $4;
Share of total U.S. FDI, 2002: 0.29%;
Percentage change 1999-2002: -10%;
Share in manufacturing: 7%;
Share in information: 6%;
Share in professional, scientific, and technical: 0%.

Asia and Pacific: Philippines;
U.S. FDI 2002, (billions U.S. dollars): $4;
Share of total U.S. FDI, 2002: 0.27%;
Percentage change 1999-2002: 16%;
Share in manufacturing: 50%;
Share in information: [B];
Share in professional, scientific, and technical: 0%.

Asia and Pacific: Singapore;
U.S. FDI 2002, (billions U.S. dollars): $61;
Share of total U.S. FDI, 2002: 4.03%;
Percentage change 1999-2002: 197%;
Share in manufacturing: 28%;
Share in information: 2%;
Share in professional, scientific, and technical: [C].

Asia and Pacific: Taiwan;
U.S. FDI 2002, (billions U.S. dollars): $10;
Share of total U.S. FDI, 2002: 0.66%;
Percentage change 1999-2002: 50%;
Share in manufacturing: 38%;
Share in information: 0%;
Share in professional, scientific, and technical: 1%.

Asia and Pacific: Thailand;
U.S. FDI 2002, (billions U.S. dollars): $7;
Share of total U.S. FDI, 2002: 0.45%;
Percentage change 1999-2002: 25%;
Share in manufacturing: 48%;
Share in information: 1%;
Share in professional, scientific, and technical: 1%.

Asia and Pacific: Other;
U.S. FDI 2002, (billions U.S. dollars): $3;
Share of total U.S. FDI, 2002: 0.2%;
Percentage change 1999-2002: 40%;
Share in manufacturing: 7%;
Share in information: 0%;
Share in professional, scientific, and technical: 1%.

Addenda: Eastern Europe;
U.S. FDI 2002, (billions U.S. dollars): $17;
Share of total U.S. FDI, 2002: 1.09%;
Percentage change 1999-2002: 15%;
Share in manufacturing: 32%;
Share in information: 4%;
Share in professional, scientific, and technical: 4%.

Addenda: European Union (15);
U.S. FDI 2002, (billions U.S. dollars): $700;
Share of total U.S. FDI, 2002: 46.02%;
Percentage change 1999-2002: 24%;
Share in manufacturing: 27%;
Share in information: 6%;
Share in professional, scientific, and technical: 3%.

Addenda: OPEC;
U.S. FDI 2002, (billions U.S. dollars): $31;
Share of total U.S. FDI, 2002: 2.03%;
Percentage change 1999-2002: 31%;
Share in manufacturing: 12%;
Share in information: 7%;
Share in professional, scientific, and technical: 4%.

Source: GAO analysis of Department of Commerce data.

[A] Rounds to less than 1 billion in U.S. foreign direct investment.

[B] Value of FDI in the industry is negative. FDI is negative when
total values of inter-company debt or reinvested earnings are negative
and greater than the value of the U.S. parent companies' equity in
their foreign affiliates for that particular industry.

[C] Data were suppressed or below a certain threshold.

Note: Country-level U.S. foreign direct investment abroad is valued on
an historical cost basis. See [Hyperlink, http://www.bea.gov] for more
information.

Industries other than manufacturing; information; and professional,
scientific, and technical services; are not shown. These industries
include mining, utilities, wholesale trade, depository institutions,
finance and insurance, and other industries.

Data in this table include both majority and minority-owned foreign
affiliates.

[End of table]

Multinational Companies' Outsourcing to Domestic and Foreign
Suppliers:

Data on U.S. MNC parent companies' operations in the United States,
which lag by a year the data on direct investment, have the potential
to determine the extent to which these companies are using offshore
goods and services in their production. (See table 11.) The data show
that U.S.-based operations have tended to increase their outsourcing
over time, particularly in parent companies classified in manufacturing
industries. However, these data do not indicate whether the outsourcing
is to purchase goods or services or whether domestic or offshore
companies are supplying the outsourcing. For example, in the
manufacturing sector, the degree to which U.S. multinational companies
are using intermediate inputs in their domestic production has risen
from under 60 percent in the 1980s to over 70 percent in 2001.
Industries such as the information industry and the professional,
scientific, and technical industry are outsourcing around 50 percent
of their production value. The Bureau of Economic Analysis has
reported that it is evaluating the feasibility of preparing estimates
of indirect purchases from offshore suppliers; it already collects
data on direct purchases from offshore suppliers.

Table 11: Value and Share of Intermediate Purchases (Outsourcing) in U.S. Multinational Companies' U.S.-based Operations, 1999-2001:

All industries;
Intermediate purchases (dollars in billions): 1999: $4,061;
Intermediate purchases (dollars in billions): 2000: $4,554;
Intermediate purchases (dollars in billions): 2001: $4,921;
Share of intermediate purchases in total sales: 1999: 68%;
Share of intermediate purchases in total sales: 2000: 68%;
Share of intermediate purchases in total sales: 2001: 72%.

Mining;
Intermediate purchases (dollars in billions): 1999: $21;
Intermediate purchases (dollars in billions): 2000: $29;
Intermediate purchases (dollars in billions): 2001: $28;
Share of intermediate purchases in total sales: 1999: 53%;
Share of intermediate purchases in total sales: 2000: 51%;
Share of intermediate purchases in total sales: 2001: 44%.

Utilities;
Intermediate purchases (dollars in billions): 1999: $147;
Intermediate purchases (dollars in billions): 2000: $326;
Intermediate purchases (dollars in billions): 2001: $461;
Share of intermediate purchases in total sales: 1999: 62%;
Share of intermediate purchases in total sales: 2000: 80%;
Share of intermediate purchases in total sales: 2001: 82%.

Manufacturing;
Intermediate purchases (dollars in billions): 1999: $1,800;
Intermediate purchases (dollars in billions): 2000: $2,034;
Intermediate purchases (dollars in billions): 2001: $2,031;
Share of intermediate purchases in total sales: 1999: 66%;
Share of intermediate purchases in total sales: 2000: 67%;
Share of intermediate purchases in total sales: 2001: 70%.

Information;
Intermediate purchases (dollars in billions): 1999: $216;
Intermediate purchases (dollars in billions): 2000: $217;
Intermediate purchases (dollars in billions): 2001: $285;
Share of intermediate purchases in total sales: 1999: 47%;
Share of intermediate purchases in total sales: 2000: 42%;
Share of intermediate purchases in total sales: 2001: 53%.

Publishing industries;
Intermediate purchases (dollars in billions): 1999: $35;
Intermediate purchases (dollars in billions): 2000: $34;
Intermediate purchases (dollars in billions): 2001: $41;
Share of intermediate purchases in total sales: 1999: 47%;
Share of intermediate purchases in total sales: 2000: 41%;
Share of intermediate purchases in total sales: 2001: 49%.

Motion picture and sound recording industries;
Intermediate purchases (dollars in billions): 1999: $10;
Intermediate purchases (dollars in billions): 2000: $7;
Intermediate purchases (dollars in billions): 2001: $10;
Share of intermediate purchases in total sales: 1999: 58%;
Share of intermediate purchases in total sales: 2000: 68%;
Share of intermediate purchases in total sales: 2001: 86%.

Broadcasting and telecommunications;
Intermediate purchases (dollars in billions): 1999: $150;
Intermediate purchases (dollars in billions): 2000: $158;
Intermediate purchases (dollars in billions): 2001: $190;
Share of intermediate purchases in total sales: 1999: 45%;
Share of intermediate purchases in total sales: 2000: 42;
Share of intermediate purchases in total sales: 2001: 52%.

Broadcasting, cable networks, and program distribution;
Intermediate purchases (dollars in billions): 1999: $50;
Intermediate purchases (dollars in billions): 2000: $62;
Intermediate purchases (dollars in billions): 2001: $58%;
Share of intermediate purchases in total sales: 1999: 62%;
Share of intermediate purchases in total sales: 2000: 62%;
Share of intermediate purchases in total sales: 2001: 69%.

Telecommunications;
Intermediate purchases (dollars in billions): 1999: $100;
Intermediate purchases (dollars in billions): 2000: $96;
Intermediate purchases (dollars in billions): 2001: $132%;
Share of intermediate purchases in total sales: 1999: 40%;
Share of intermediate purchases in total sales: 2000: 35%;
Share of intermediate purchases in total sales: 2001: 47%.

Information services and data processing services;
Intermediate purchases (dollars in billions): 1999: $21;
Intermediate purchases (dollars in billions): 2000: $18;
Intermediate purchases (dollars in billions): 2001: $44;
Share of intermediate purchases in total sales: 1999: 50%;
Share of intermediate purchases in total sales: 2000: 36%;
Share of intermediate purchases in total sales: 2001: 57%.

Professional, scientific, and technical services;
Intermediate purchases (dollars in billions): 1999: $94;
Intermediate purchases (dollars in billions): 2000: $101;
Intermediate purchases (dollars in billions): 2001: $103;
Share of intermediate purchases in total sales: 1999: 50%;
Share of intermediate purchases in total sales: 2000: 50%;
Share of intermediate purchases in total sales: 2001: 50%.

Architectural, engineering, and related services;
Intermediate purchases (dollars in billions): 1999: $16;
Intermediate purchases (dollars in billions): 2000: $16;
Intermediate purchases (dollars in billions): 2001: $18;
Share of intermediate purchases in total sales: 1999: 69%;
Share of intermediate purchases in total sales: 2000: 69%;
Share of intermediate purchases in total sales: 2001: 69%.

Computer systems design and related services;
Intermediate purchases (dollars in billions): 1999: $47;
Intermediate purchases (dollars in billions): 2000: $49;
Intermediate purchases (dollars in billions): 2001: $48;
Share of intermediate purchases in total sales: 1999: 53%;
Share of intermediate purchases in total sales: 2000: 56%;
Share of intermediate purchases in total sales: 2001: 56%.

Management, scientific, and technical consulting;
Intermediate purchases (dollars in billions): 1999: $11;
Intermediate purchases (dollars in billions): 2000: $11;
Intermediate purchases (dollars in billions): 2001: $10;
Share of intermediate purchases in total sales: 1999: 54%;
Share of intermediate purchases in total sales: 2000: 49%;
Share of intermediate purchases in total sales: 2001: 45%.

Advertising and related services;
Intermediate purchases (dollars in billions): 1999: $5;
Intermediate purchases (dollars in billions): 2000: $7;
Intermediate purchases (dollars in billions): 2001: $9;
Share of intermediate purchases in total sales: 1999: 38%;
Share of intermediate purchases in total sales: 2000: 38%;
Share of intermediate purchases in total sales: 2001: 48%.

Other;
Intermediate purchases (dollars in billions): 1999: $16;
Intermediate purchases (dollars in billions): 2000: $18;
Intermediate purchases (dollars in billions): 2001: $19;
Share of intermediate purchases in total sales: 1999: 35%;
Share of intermediate purchases in total sales: 2000: 36%;
Share of intermediate purchases in total sales: 2001: 34%.

Source: GAO analysis of Department of Commerce data.

Notes: Intermediate purchases are the industries' output minus gross
product. Gross product is the portion of the industry's output that
reflects its own production, often referred to as the industry's value
added. Intermediate purchases (or inputs) are the products that the
industry acquires from other industries to produce its output. In these
calculations, sales are used to represent output. Output is equal to
sales plus change in inventories, so sales may misrepresent output.
However, for service industries, inventories will generally be
insignificant, and for manufacturing, BEA's own calculations that
incorporate inventories are nearly identical to the calculations we
present in this table.

Selected industries shown. Wholesale trade, depository institutions,
finance and insurance, and other industries not shown. In some of these
categories, intermediate purchases may include values of goods sold
with further processing. For example, wholesale trade sales and
purchases include the value of these goods. This would change the share
of intermediate purchases in total value.

[End of table]

Data Limitations and Reliability:

BEA data on MNCs and their affiliates have limitations relating to firm
and item coverage, timeliness, and frequency. The reliability of the
BEA data on MNCs relates both the exemption levels of the annual and
benchmark surveys and the collection of additional detail in the
benchmark surveys.

To a large extent, the limitations and reliability of these BEA data
relate to efforts to restrict respondent burden as required under
provisions of the Paperwork Reduction Act of 1995.[Footnote 66]

With regard to coverage, annual BEA surveys exclude banking activities
of both U.S. and foreign MNCs and provide no data on employment by
occupation of U.S. MNCs or their foreign affiliates. In addition,
because some U.S. MNCs may be foreign owned, there is some duplication
between the data on U.S. parent companies and on U.S. affiliates. BEA
recommends that data on U.S. parents should not be added to U.S.
affiliates to produce U.S. totals.[Footnote 67] Certain data items
relevant to offshoring, such as trade in selected services, are
collected only in benchmark years and do not cover all types of
services. In addition, in the benchmark survey, data on sales of goods
and services by country of destination are not collected for minority-
owned affiliates and small majority-owned affiliates.

With regard to timeliness and frequency, BEA data on MNC operations are
not available quarterly, and annual data become available with a 2-year
lag. For example, when this report was completed, the latest year for
which we had annual survey-based detail was 2001. These estimates are
subject to revision when the results of benchmark surveys are
incorporated. The most recent benchmark data on U.S. MNCs and their
foreign affiliates are for 1999. The most recent data on U.S.
affiliates of foreign MNCs are for 1997. Results of the 2002 benchmark
survey are scheduled to be released later this year.[Footnote 68]

In 2004, BEA initiated an effort to improve the timeliness of these
data. In April 2004, BEA released summary estimates for 2002 of
employment, sales, and capital expenditures by U.S. MNCs and their
foreign affiliates, and by U.S. affiliates of foreign MNCs. The 2002
estimates to be released later in 2004 will be based on more complete
source data and include country and industry detail.[Footnote 69]

As noted above, the reliability of the BEA data on MNCs relates
primarily to the exemption levels of both the annual and benchmark
surveys, which, in turn, relate to efforts to restrict respondent
burden. There are also several other reliability issues with the MNC
data collected by BEA that could impact the data related to offshoring.
The exemption levels for the reporting of affiliates in the annual
surveys are based on the affiliates' total assets, sales, or net
income. For majority-owned affiliates, detailed reporting is required
if either of these is greater than $100 million; less detailed
reporting is required for majority-owned affiliates with between $30
million and $100 million. For minority-owned affiliates, reporting is
required if any of the three items is greater than $30 million. In the
benchmark survey, the exemption limit for the short form for majority
or minority-owned affiliates is $7 million of total assets, sales, or
net income. This also means that smaller affiliates are covered only
once every 5 years, so that the trends in the annual data would be
misstated to the extent that the trends for smaller affiliates differ
from the larger ones.[Footnote 70] For example, if there were rapid
increases in smaller affiliates relating to an increase in offshoring,
the annual trends would understate the growth of employment in foreign
affiliates of U.S. MNCs.

Other reliability issues relate to the universe frame used by BEA to
ensure complete reporting. Although the MNC surveys are mandatory
regardless of whether a firm receives a form, the mailing list used by
BEA is constructed from publicly available information and not from
comprehensive business registers such as those used by BLS and the
Census Bureau for their own surveys. Consequently, it is possible that
BEA's coverage of small and new firms is limited. In addition, the data
reported to BEA are based largely on financial accounting records, and
in recent years many of these earlier records have been restated. BEA
has not reported that it has been obtaining revised reports from these
firms. Although these restatements would impact on the reported profits
data, it is not likely that they would affect the employment data.

[End of section]

Appendix V: Comments from the Department of Commerce:

UNITED STATES DEPARTMENT OF COMMERCE:
The Under Secretary for Economics Affairs:
Washington, D.C. 20230:

AUG 27 2004:

Mr. Loren Yager:
Director:
U.S. Government Accountability Office:
International Affairs and Trade:
Room 4344:
Washington, DC 20548:

Dear Mr. Yager:

Thank you for the opportunity to review and comment on the GAO draft
report "International Trade: Current Government Data Provide Limited
Insight Into Offshoring of Services." In the context of an $11 trillion
economy with nearly 140 million workers, the number of U.S. jobs
offshored in recent years is relatively small, even by the largest
estimates. But we are all troubled when American workers lose their
jobs, whether the reason is technological change, business
restructuring, an economic slowdown, or offshoring. The most powerful
remedy for this problem is a growing economy that can ensure every
American who wants a job is able to find one.

As the report notes, even defining "offshoring" presents significant
difficulties. In addition, many of our current statistical methods were
not designed to measure the phenomenon, as your report carefully
documents. These are some of the reasons why existing data were unable
to provide immediate and clear guidance on this issue when public
discussion first started. Despite these difficulties, Commerce's
statistical agencies - the Bureau of the Census and the Bureau of
Economic Analysis - are committed to refining their understanding of
the issues surrounding offshoring. A dynamic economy requires a dynamic
approach to defining and measuring economic data.

While more and better data will help us address this issue, the
fundamental questions about offshoring cannot be answered by government
surveys alone. Disentangling the causes and the effects of changes in
patterns of production, employment, and incomes involves not simply
added data collection, but complex analysis that also involves prices,
exchange rates, and economic growth in the United States and abroad.
GAO's intentions to follow up this study with additional reports on the
topic should allow more careful consideration of the analysis - as well
as the measurement - of offshoring.

We appreciate the thoroughness of your review of government data
pertaining directly and indirectly to offshoring of services. This
report will be a useful reference for people wanting to know more about
the causes, extent, and consequences of offshoring. However, the report
could benefit from at least a brief discussion of "inshoring" of
services and jobs by foreign-based firms. Such an exposition would
complement the report as currently written. Moreover, it would place
offshoring within the broader context of the benefits of free trade.

Thank you again for the opportunity to review the report. We are
providing technical comments on the report separately.

Sincerely,

Signed by:

Kathleen B. Cooper:

[End of section]

Appendix VI: GAO Contacts and Staff Acknowledgments:

GAO Contact:

Virginia Hughes, (202) 512-5481:

Staff Acknowledgments:

In addition to the contact named above, Scott Farrow, Robert Parker,
Linda Lambert, Yesook Merrill, Andrew Sherrill, Tim Wedding, Frank
Maguire, Richard Seldin, Judith Knepper, Patricia Slocum, Carmen
Donohue, Mark Fostek, Bradley Hunt, Katrina Ryan, and Yunsian Tai made
major contributions to this report.

(320280):

FOOTNOTES

[1] Data on gross domestic product are available for 2003, but data for
some other series reported in this section were not. Gross domestic
product data for 2003 show similar shares of services and goods
production as in 2002.

[2] U.S. consumption of services (private domestic consumption) is
calculated as U.S. production of services plus U.S. imports of services
minus U.S. exports of services.

[3] Since no standard definition for offshoring exists, different
definitions include varying types of business activity. For example, a
business expanding its overseas operations (without changing its
domestic operations) in order to supply a foreign market would
generally not be included in offshoring definitions.

[4] Progressive Policy Institute, "Understanding the Offshoring
Challenge" (May 2004); McKinsey and Company, "Offshoring: Is It a Win-
Win Game?" (August 2003); American Electronics Association, "Offshore
Outsourcing In An Increasingly Competitive And Rapidly Changing World"
(March 2004), and Carnegie Mellon University School of Computer
Science, "The Capability Model for IT-enabled Outsourcing Service
Providers" (Nov. 19, 2001).

[5] The Insight Research Corporation, "IP Telephony: Service Revenue
and OSS Expenditures for Voice Over Packet Networks 2002-2007" (October
2002).

[6] A network protocol refers to a detailed process the sender and
receiver agree upon for exchanging data.

[7] The Yankee Group Inc., "The Yankee Group Predictions for 2004"
(January 2004).

[8] Forrester Research, Inc., "Unlocking the Savings in Offshore"
(February 2003), and Offshore Outsourcing: Business Models, ROI, and
Best Practices, Mivar Press, Inc, (January 2004), The Brookings
Institution Policy Brief #132, "'Offshoring' Service Jobs: Bane or
Boon-and What to Do?" (April 2004), and Booz Allen Hamilton, "Business
Process Offshoring: Making the Right Decision" (December 2003).

[9] Forrester Research, Inc., "3.3 Million U.S. Jobs to Go Offshore"
(November 2002).

[10] Gartner, Inc., "Geosourcing: Is It Right For You?" U.S. Spring
Symposium (Mar. 28, 2004 to Apr. 1, 2004).

[11] Aberdeen Group, "Offshore Software Outsourcing Best Practices:
Building Successful Relationships on a Diverse Business Model"
(September 2002).

[12] Aberdeen Group.

[13] Carnegie Mellon University's Software Engineering Institute is
recognized for its expertise in developing models and methods that
define and determine organizations' software systems process maturity.

[14] Of the organizations headquartered outside of the United States,
31 are in India, 5 are in Japan, 3 are in China; 2 each are in Hong Kong
and the Republic of Korea; Australia, Colombia, Malaysia, Russia, and
Thailand each have one organization.

[15] GAO, Major Management Challenges and Program Risks: A
Governmentwide Perspective, GAO-03-95 (Washington D.C.: January 2003).

[16] The Wharton School of the University of Pennsylvania,
Knowledge@Wharton, "The Case For, and Against, Shifting Back-office
Operations Overseas" (Sept. 25, 2002).

[17] Gartner, Inc., "Weigh These Eight Factors Before Deciding to Go
Offshore," Decision Framework, #DF-IL-4293 (May 3, 2004).

[18] Gartner, Inc., "The IT Operations Group's Role in Outsourcing",
Article Top View #AV-16-2110 (Apr. 30, 2002).

[19] Gartner, Inc., "'Geosourcing': Is It Right For You?" U.S. Spring
Symposium (Mar. 28, 2004, to Apr. 1, 2004).

[20] GAO, Desktop Outsourcing: Positive Results Reported, but Analyses
Could Be Strengthened, GAO-02-329 (Washington D.C.: Mar. 29, 2002).

[21] Ashok Bardhan and Cynthia Kroll, "The New Wave of Outsourcing,"
Fisher Center for Real Estate and Urban Economics, University of
California, Berkeley (Fall 2003).

[22] BEA refers to these entities as "persons," which can include
either individuals or companies. Detailed data are published annually.
See appendix III for more information on these data.

[23] Services trade data for 2003 are available, but primarily at an
aggregate level (total private services and subcategories, such as
other private services). Since data at a country and detailed service
level are not yet available, we discuss 2002 data.

[24] Detailed data on U.S. services trade covering 2003 will be
released in October 2004.

[25] Some BPT subcategories are not broken down by country because the
magnitude of the data is either too small, or the data could reveal the
operations of individual entities and is therefore required to be
suppressed.

[26] India's National Association of Software and Service Companies
reports a larger dollar value for India's computer and data processing
exports to the United States (as compared to U.S. data on those imports
from India) because it includes the value of services supplied by
Indian citizens residing in the United States in its international
services transactions.

[27] When discussing foreign investment, we are referring to
investments to acquire a lasting ownership stake in a foreign affiliate
(U.S. direct investment abroad) defined as ownership of at least 10
percent of the voting securities in an incorporated business or an
equivalent interest in an unincorporated business.

[28] U.S. foreign affiliates classified as manufacturing use some
services in their production processes and may also produce some
services that are sold locally or exported. Data on the occupations of
employees of U.S. foreign affiliates are not available.

[29] Detailed U.S. foreign investment data covering 2003 will be
released in September 2004.

[30] Annual data on multinational companies' foreign affiliates
excludes banks.

[31] Principal place of performance refers to the city, state, foreign
country, or government installation where the service will be
performed. If more than one location is involved, the agency is
directed to report the location involving the largest dollar share of
the contract. There is no data on the nationality of the persons who
perform government services' contract work in the U.S. and offshore
locations.

[32] The FPDS contains procurement data from approximately 60 executive
branch agencies. The Federal Aviation Administration, the U.S. Postal
Service, the legislative and judicial branches, and several other
government entities are not required to report their procurement
activities to FPDS.

[33] GAO, Reliability of Federal Procurement Data, GAO-04-295R
(Washington, D.C.: Dec. 30, 2003). Our work and that of agency
inspectors general indicates that many of the errors in FPDS are due to
data entry mistakes by agency contracting personnel. We have
recommended steps to help improve data reliability in the planned
successor to FPDS.

[34] We did not independently verify the information in the database,
but we did perform electronic tests of relevant fields. For example, we
tested for completeness by checking key fields for missing data and
found missing values in all cases were 1 percent or less.

[35] The greatest percentage increase in contract dollars with
performance or manufacture locations in foreign countries occurred
between fiscal years 2002 and 2003 (approximately 61 percent increase).
Most of this increase can be attributed to the U.S. war on terrorism,
since countries such as Iraq and Afghanistan accounted for over half of
the increase. Other countries that showed a large increase in the
dollar value of services contracts from October 2002 to September 2003
were Bahrain, Germany, Italy, Kuwait, Russia, Saudi Arabia, and Turkey.

[36] The latest survey of the first quarter of 2004 was released in
June.

[37] The new survey asks employers (except those citing seasonal work
or vacation as a reason for layoffs) specifically whether their
company's layoffs involved relocation. It further asks if the
relocation involved an intracompany or intercompany move and whether it
was a domestic or offshore relocation. The MLS does not collect data on
the occupation.

[38] The CES survey collects separate data on production and
nonproduction or supervisory and nonsupervisory employees; it does not
collect data by occupation. Monthly CES data are generally available on
the first Friday of the following month. For example, data for June
2004 reported in this study were released on July 2.

[39] The BLS surveys 1.2 million establishments over the full 3-year
sampling period--400,000 each year.

[40] May 2003 data, the latest release, was published in April 2004.
Data including the November 2003 sample will be released in October
2004.

[41] The latest projections covering the period 2002-2012 were released
in February 2004 and provide estimated 2012 employment levels for over
700 occupations.

[42] Although data in the two surveys are not comparable, the 2004
survey data suggest that the new survey is identifying more offshoring-
related separations than the older one, which identified 0.9 percent of
layoffs as attributable to "overseas relocation" in 2003.

[43] The National Bureau of Economic Research identified March 2001 as
the date that the 2001 recession began. We selected these industries
based mainly on Digital Economy 2003 by the U.S. Department of Commerce
and Ashok Bardhan and Cynthia Kroll, "The New Wave of Outsourcing,"
Fisher Center for Real Estate and Urban Economics, University of
California, Berkeley (Fall 2003).

[44] These occupations are selected based on the Forrester report and
the Fisher study by Askok Bardham and Cynthia Kroll. The average hourly
wages reported in the table may in some cases overstate the wages for
some of the occupations in the category. For example, although the
legal occupation includes lawyers (highly paid) and paralegals
(relatively lower-paid), paralegals are associated with a higher risk
of offshoring than are lawyers.

[45] Data for 2003 will be available in October 2004.

[46] This difference largely reflects different macroeconomic
assumptions used for the two sets of the projections. GDP growth rates
assumed for 2000 through 2010 and 2002 through 2012 were 3.4 percent
and 3.0 percent, respectively. Long-run unemployment rates assumed for
2000 through 2010 and 2002 through 2012 were 4.0 percent and 5.2
percent, respectively.

[47] Michael Horrigan, "Employment Projections to 2012: Concepts and
Context," Monthly Labor Review (February 2004). BLS employment
projections are based on trend analyses of detailed establishment-based
time-series data. Thus, the effects of the recent events are implicitly
captured to the extent that the data reflect the recent past.

[48] For determining future employment trends by occupation, BLS
analysts rely heavily on field interviews with occupation experts from
organizations such as professional organizations, trade associations,
academic institutions, research organizations, and unions.

[49] Although we discuss some of the methodological limitations of
these studies, we are reporting the studies and their results primarily
to provide information on how researchers have assessed the effects of
offshoring on the U.S. economy and the challenges they faced in doing
so. However, we have not assessed the overall validity, accuracy, or
reliability of these studies. See appendix 1 for more information.

[50] Forrester Research, "3.3 Million U.S. Service Jobs to Go
Offshore," by John McCarthy, November 11, 2002.

[51] Forrester updated its original estimate, increasing the total
number of jobs to 3.4 million by 2015. See Forrester Research, "Near-
term Growth of Offshoring Accelerating," by John McCarthy, May 14,
2004.

[52] International Economics Policy Briefs, "Globalization of IT
Services and White Collar Jobs: The Next Wave of Productivity Growth,"
Catherine L. Mann, Institute for International Economics (Washington,
D.C.: December 2003.)

[53] "The Comprehensive Impact of Offshore IT Software and Services
Outsourcing on the U.S. Economy and the IT Industry," prepared by
Global Insight (USA), Inc. and sponsored by the Information Technology
Association of America, (Arlington, Va.: March 2004.) Global Insight
estimates the effects of offshoring by comparing two forecasts of data
series, one with the offshoring occurring and one without, rather than
by direct observation of a specific statistical series.

[54] The Brookings Institution Policy Brief, "'Offshoring' Service
Jobs: Bane or Boon--And What to Do?" Lael Brainard and Robert Litan,
Brookings Institution (Washington D.C.: April 2004).

[55] See Dani Rodrik, Has Globalization Gone Too Far (Washington, D.C.:
Institute for International Economics, 1997).

[56] For example, the major shift in the economy from goods to services
created challenges for measuring output, and the rapid technological
changes in recent decades have created difficulties in measuring price
change. See, for example, "Measuring the New Economy" by J. Steven
Landefeld and Barbara Fraumei, Survey of Current Business (Washington,
D.C.: Bureau of Economic Analysis, March 2001), 23-40; "Numbers Matter:
The U.S. Statistical System and a Rapidly Changing Economy," by Barry
Bosworth and Jack Triplett (Washington, D.C.: Brookings Institution,
July 16, 2004) Policy Brief #63; and National Bureau of Economic
Research: Output Measurement in the Service Sectors, Volume 56; Price
Measurement and their Uses, Volume 57.

[57] FPDS is the central database of information on federal procurement
actions reported by approximately 60 executive branch agencies. It
contains detailed information on contracting actions over $25,000,
including the amount obligated, the types of goods and services
purchased, various vendor characteristics, and the principal place of
performance or country of manufacture. Principal place of performance
refers to the city, state, foreign country, or government installation
where the service will be performed.

[58] Services (as well as goods) that are used by a company in its
operations to produce other products are considered "intermediate"
inputs.

[59] The next benchmark survey will be for 2004.

[60] Monthly estimates are prepared about 45 days after the end of each
month, but they are not discussed in this report. Also, because the
results of the new quarterly surveys will not be available until 2005,
they are not discussed in this section.

[61] 15 C.F.R. § 806.

[62] 22 U.S.C. §§ 3101-3108.

[63] The Act is intended to provide clear and unambiguous authority for
the President to collect information on international investment and
United States foreign trade in services. Id. § 3101(b).

[64] BEA officials have indicated that the coverage problem is likely
to be greater for imports of services than for exports because there
are more importers, and exporters tend to be larger firms. They also
note that even if BEA had access to the Census business register,
sampling all businesses would be very expensive significantly increase
respondent reporting burden.

[65] 1999 is the earliest year data were available based on the current
industry classification system, the North American Industry
Classification System (NAICS). Prior to 1999, data are classified under
the Standard Industrial Classification (SIC) system.

[66] See 44 U.S.C. §§ 3501-3521.

[67] For 2001, for example, BEA reported that U.S. parent companies
that were, in turn, controlled by foreign parent companies accounted
for 9 percent of the value added in production by all U.S. parents.

[68] See U.S. Direct Investment Abroad: Final Results from the 1999
Benchmark Survey, and Foreign Direct Investment in the United States:
Final Results from the 1997 Benchmark Survey.

[69] See April 16, 2004, Department of Commerce/BEA News, "Summary
Estimates of Multinational Companies: Employment, Sales, and Capital
Expenditures for 2002."

[70] In both the benchmark and annual surveys, BEA imputes values for
majority-owned affiliates that are below the exemption limits. For
minority-owned affiliates, imputation is limited to employment and some
other items.

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