EE Times: First give us some perspective on the history of what is now called "offshoring."

Rowen: Not all technology has been invented in the U.S. If you go back to the 19th century we started out with none: we got it all from Europe in the Industrial Revolution. And there was a certain amount of thievery involved — if you want to call it that — by the U.S. as we acquired a great deal from Britain, France, Germany during that era. But then we got good at it ourselves, developing the telephone and telegraph, for example.

The use of offshoring to manufacture goods is not new. Take Henry Ford. He didn't export many cars, but invested in plants overseas; it was simply not an issue. Then, in the latter half of the century we had some major shifts in technology, leading to considerable worry in the 1980s about the Japanese. It is useful to remember that the government's alarm became much ado about not a lot.

Certain jobs were being done in Southeast Asia back in the '60s, like putting semiconductors into packages, that involved a lot of little work and that was being done in Penang and Singapore. It was just cheaper. That was not engineering — it was more like today's call centers.

What happened was the Japanese got good at a lot of things. They came to dominate consumer electronics and they had great aspirations to play a leading role in computers, but they never managed to do it. They're there, obviously, but they never really carved out a leading role. In hindsight, you can see why: they've never invented anything fundamental, although their two Nobel Prizes show that they're beginning to. They're very good at what they do. They're so meticulous, but somebody has to be assigned the domain and then they work on it.

They tried to devise their own operating system. They had the Fifth Generation Computer. That flopped. Scott Callon, in his doctoral dissertation at Stanford in the political science department, looked at these cooperative programs the Japanese had in the '80s. He documented in detail how only one succeeded. One of the reasons they failed is that the companies in fact wouldn't cooperate with each other: the famous Japanese cooperative culture stopped at the company boundary. American companies are much more inclined to share than the Japanese.

EET: The big fear is that we are sending jobs offshore that require a high degree of intellectual capacity while in the past it was largely manual labor.

Rowen: That's certainly an issue. There are a lot of people from Asia especially who have studied here and worked here and know how to do things. They've learned a great deal by coming to this country and working here, and some of that skill is being transferred back.

Take Taiwan. A lot of Taiwanese came here to study, with the numbers becoming pretty significant in the '70s and '80s. I went to Hsinchu, Taiwan, in 1981 and there were about six companies there. I interviewed all of them. Either the CEO or the chief engineer was a Chinese who had worked in the U.S. a long time for companies like Sperry or GE, and they'd been persuaded to go to Taiwan and there they were. They knew a lot about how to do things. That helped a great deal in setting up their OEM [original equipment manufacturer] business and increasingly their ODM [original design manufacturer] business — higher-level work. They've invested a lot in R&D. Look at the rank order of patents: U.S., Japan, Germany, Taiwan, Britain, France, Korea. I doubt that 20 years ago Taiwan or Korea would have even been in the top 10.

Taiwan's story is it's found a niche. The companies there are very nimble — they move faster. The Japanese are deliberate and meticulous; the Taiwanese are very fast. The Taiwanese have a special advantage of being Chinese so they're now operating on the mainland in a big way, though they're worried that they're going to get squeezed by the mainland government and by us. I don't know if we're going to squeeze them, but the mainland pressure they can see. So they have this middleman position.

EET: Are you seeing a similar dynamic there, with Taiwanese companies offshoring operations further down the food chain to the mainland?

Henry Rowen: U.S. defines the top of the food chain.

Rowen: Absolutely — on a big scale. One could say there's a hollowing-out effect on these companies. A couple of years ago I visited a Taiwanese factory, Lite-On, in South China. This factory was making and assembling printers and scanners with Hewlett-Packard and Dell logos on them. The boss was a Taiwanese who spoke English with an American accent; all the workers were local. It's happening all over the place. Taiwanese face some of the same issues we face in terms of jobs moving. So it's not just us.

EET: Do you see more American companies setting up design subsidiaries offshore or outsourcing and offshoring at the same time?

Rowen: At one level you can say it doesn't make a difference. If the interactions are complex, keep it inside the company. If it's something that's more modular and you can write a contract for it and the interface is fairly simple, you contract it out. That's true whether it's inside the U.S. or in India or somewhere else. For example, GE has a really big operation in Bangalore that's part of GE — thousands of people. They have decided they want to keep it inside the company.

EET: Is the United States as a country and an educational system in a position to move up the food chain and, if so, what's the next rung on the ladder?

Rowen: We define the top of the food chain. You could include the Europeans, although less in the IT area. What defines the top of the food chain is inventions: it's who makes inventions. Sure, it'll happen with the Chinese some day. There are quite a few smart ones; they'll get around to it.

EET: In the political debate, one side of the argument is that the quality suffers when you design offshore. Do you see a quality issue at all?

Rowen: One would assume that the companies know what they're doing. Obviously, people can make mistakes but insiders generally know more than outsiders. Wouldn't you think that, say, an Agilent or a Cisco or somebody with a design operation in, say, Bangalore would know what they're doing? You would. What is important — and there's a lot of interest in this aspect — is where are the interfaces simple and where are they complex? If they're complex, you do things within the company, though you may want to co-locate those things because of the communications — people do get together for meetings still.

Why are we doing this? One of my sons is a program manager for Cisco. He says the next time he does a project, he's going to insist that the team be co-located. What does that say about doing half of the work here and half of the work in Bangalore? The answer to that is that you don't try to divide the project up but assign the responsibilities of the whole project to one group.

Clayton Christiansen in his book Innovator's Solution has a page related to this in which he mentions my son, [Tensilica CEO] Chris [Rowen]. Clayton has come up with the idea on the law of conservation of modularity, which states you make money off the modules that get tied to the integrated whole. What's made all of this possible is modularity. In the old days at IBM everything was so complicated and new that you couldn't hand off very much. Then came the famous Wintel revolution, enabled modules, then boxes were made. Bingo! All these other countries were able to get in the act. The Taiwanese were the first to jump on this, then the Indians helping in software — as the number of applications proliferated there was a great demand for all these talented Indians whose salaries were very low.

Another important aspect is that telecommunications costs came way down. So modularity enabled this to happen and people could be anywhere and play. But when modularity doesn't exist, you can't do it. Someone has to figure out what kinds of products, the overall strategy, where to be and how to get the R&D going. That takes people more or less in one place. It's a kind of work that's very intellectual; it's complex.

EET: Is there a risk in an election year that the issue becomes such a hot-button issue that the government steps in and tries to police an issue that's really a free-markets matter?

Rowen: It could do a lot of damage to this region. Think about the international linkages here — it's enormous. We really depend on trade. I can't think of any region in the U.S. where it could do more damage than in Silicon Valley. Will the government do anything? Not this year. The question is will the Congress do anything next year to pass legislation. I wouldn't want to rule it out. But there are so many interests vested in keeping the trading system going that there would be a lot of opposition to a serious blockage of trade and technology transfer.

EET: So the top of the food chain is inventions and inventors. Is the United States just fortunate to have a culture that allows mistakes and in turn creates a culture of innovation, or can that be transferred or learned in other countries?

Rowen: It's not that we have a lock on the largest proportion of the smartest people. Clearly we don't. The point is we're open; people have been coming here. If that shuts off, the process slows down and we may be in trouble. Look at Japan: it's not open. Nobody goes there because it's fun to work there or work at a university there.

Immigration is potentially a very serious problem and the Department of Homeland Security has not helped with its visa policy. Now there are more students going to Australia, Britain, France than before. We want them here. We want the best ones here. If we don't get them, we could hurt ourselves.

What is it that other countries lack in this way? There are subtleties. The protection of intellectual property is a big problem in China; it's not a problem in Japan. Also, we have the world's most developed financial system — we finance risky ventures. Other people are trying to copy us or are find their own solutions that look like ours. For example, we have a lot of worker mobility. Other places have a lot of worker mobility but many do not. Japan does not.

Then there's the rule of law. If you have a problem you go to court. Well, that's a big problem in China and it's not so easy in India. It's not so much the rule of law there, but the judicial system is way too congested.

On education, we have the most internally competitive university system of any in the world. We compete for faculty, for students, for research dollars. It's a decentralized system. We have no ministry of education, no national university. We are used to engaging with industry and some think that's going too far. But on the whole the system is terrific.

So you put all this together and you stand back and look at it. For us up the food chain it really means driving the top of the food chain up and everybody else, we hope, following behind.