The Importance of, and Pitfalls in, Measuring Globalization

1. 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

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, 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 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