The Importance of, and Pitfalls in, Measuring Globalization J. Steven Landefeld and Obie G. Whichard Conference of European Statisticians/OECD National Accounts Meeting Geneva, April 25-28, 2006

2 Measuring Globalization  Importance of globalization and Cross-Border Trade  Globalization, offshoring, and Lou Dobbs  Indian Software Services  “Dark Matter”  Over or underestimate of current account deficit

3 GDP and Employment Source: BEA and BLS (CES data).

4 U.S. and Indian Data on Trade in BPT Services Source: BEA, NASCOMM, Reserve Bank of India (RBI), and BEA estimates based on RBI data. * BEA unaffiliated trade with India increased by the ratio of total unaffiliated trade to total unaffiliated and affiliated trade in computer and information services.

5 Measuring Globalization  Dark Matter: The problem of distentangling services trade from financial transactions.  Higher returns on USDIA than FDIUS  Result of implicit exports of U.S. knowledge capital that raise U.S. profits and or lower IIP?  Result of transfer pricing that lowers USDIA?  Host of other factors controlling returns and asset prices:  Currency risk, country political risk, country cyclical risk, relative effective tax rates, relative interest rates/opportunity costs, historical investment pattern, and capital gains and losses.  Very difficult – and risky - to impute to services.

6 International Transactions and Alternative Measures Source: BEA.

7 Potential Volatility Involved in Measuring Intangibles Source: FRB Flow of Funds (L.102 and B.102) release March 9, Data based on nonfarm nonfinancial corporate business. Note: A number of analysts attributed the large difference between equity values and the replacement value of plant and equipment to intangibles during the market run-up in the late 1990s.

8 Measuring Globalization  Pitfalls in (and techniques for) estimating cross- border services  Importance of detailed estimates  Uses of counter-party data  “Joint-products”  Estimating financial services  Globalization and incomplete reporting by large companies  The rise in direct transactions and small-firms in international trade

9 Measuring Globalization  Pitfalls in (and techniques for) estimating cross- border services (continued)  Travel and passenger surveys  Global competition and differential pricing

10 Measuring Globalization  MNC Operations Data (Foreign Affiliated Trade and Other Data) key in presenting baseline facts for offshoring:  US MNC’s employment, sales, spending in the U.S. vs. abroad.  US MNC’s overseas sales to local area vs. other regions, and the U.S.  U.S. MNC investments in large in growing markets vs. low wage countries.

11 Measuring Globalization  MNC Operations Data Issues:  Increasing use of holding companies  1982 – Holding companies accounted for 9% of USDIA; by 2004 this share had risen to 34%  Increasing problems for industry and geographic data  Industry of parent vs. industry of subsidiary  BOP vs. Ultimate beneficial owner (other treatments)  Increasing incidence of inversions  Similar issues (to India) relating to bilateral data  Increasing importance of publicizing and explaining MNC data.

12 China Statistics Comparison Source: UN, World Investment Report 2005.

13 Possible Causes of a Change in the Domestic (U.S.) Share of Employment by a U.S. MNC