The Offshoring of R&D and Design

One of the consequences of doing this story is that I now understand how the offshoring of R&D and design does (and doesn’t) show up in the GDP and trade numbers.

Let’s think about a cellphone (we won’t say which model). At first, it’s designed in the U.S. and made in Asia. Then the Asian manufacturers offer to take over the design of the next generation of cellphones. In fact, these design services will be built into the price that the Asian makers charge the U.S. company.

So, for example, in 2005 the import price was $75 per phone. In 2006, it’s still $75 per phone…but now the design services have been included as well.

In the BLS import price statistics, it looks like the price of the imported phone is unchanged. On the U.S. side, it looks like the people formerly designing cellphones have been able to move to other tasks. A great deal! We offshore design, our domestic output goes up, the real value of the imported phones stayed the same.

But here’s the problem. The import price folks are not taking account of the value of the included intellectual property when they price the phone. In the first year, the Asian company was selling the American company a cellphone. In the second, the Asian company was selling a cellphone plus the bundled design services.

In fact, if calculated correctedly, the import price of the cellphone would have gone down, and the real value of the imported cellphones would have gone up (by the value of IP). And the real growth of domestic output would have been reduced by the real value of the outsourced design services.

This example can be extended in all sorts of ways when R&D and design are bundled into the price of a product.