The Importance of and Pitfalls in Measuring Globalization

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

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 www. bea. gov 2

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

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. www. bea. gov 4

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. www. bea. gov 5

International Transactions and Alternative Measures Source: BEA. www. bea. gov 6

Potential Volatility Involved in Measuring Intangibles Source: FRB Flow of Funds (L. 102 and B. 102) release March 9, 2006. 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 1990 s. www. bea. gov 7

Measuring Globalization § Pitfalls in (and techniques for) estimating crossborder 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 www. bea. gov 8

Measuring Globalization § Pitfalls in (and techniques for) estimating crossborder services (continued) § Travel and passenger surveys § Global competition and differential pricing www. bea. gov 9

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. www. bea. gov 10

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. www. bea. gov 11

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

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