Challenges of Globalization in National Accounts

Brent Moulton and Peter van de Ven

Addressing the Challenges of Globalization in National Accounts
Chapter in forthcoming NBER book The Challenges of Globalization in the Measurement of National Accounts

National accounts are designed to measure economic activity based on national boundaries and residency. Because multinational enterprises are not defined by national identity, they pose challenges for residency-based national accounts. These challenges have become more severe with the increasing importance of knowledge assets, such as computer software, research and development, and brand equity. As these assets are neither physically not locally constrained, they can be used across a multinational enterprise without ever crossing national boundaries or any change in ownership being recorded. Furthermore, the value added and income generated by using these assets in the production of goods and services, whether or not as part of global production arrangements, can relatively easily be relocated from one country to another. Other income from these knowledge assets, such as royalties and license fees, can also be assigned to special purpose entities created to minimize the enterprise's global tax burden. These ownership arrangements have distorted traditional uses of gross domestic product as a measure economic activity, as reflected in gross domestic product (GDP), employment and productivity.
More generally, price levels of cross-border intra-concern deliveries of intermediate goods and services, and especially the use of knowledge assets and corporate services, may be governed by tax considerations, thus affecting the allocation of output and value added across countries, and consequently levels of GDP in current prices. Globalization may also affect price and volume measures for GDP. For example, intermediate consumption can be supplied from either domestic or imported sources. Thus, when the sourcing of a productive input switches, for example, from a domestic source to an imported source, the price and volume measures need to track the price differences between these sources. Failure to track these changes in sourcing leads to so-called "offshore bias".
Globalization also affects the financial accounts and balance sheets, where it would be desirable for the accounts to better identify national vulnerabilities to international financial shocks and crises. These exposures surfaced during the Great Recession of 2007 to 2009, when many countries were surprised by their vulnerability to collateralized securities and other risky instruments. While the G-20 Group, along with the Financial Stability Board and the IMF have made progress toward filling data gaps and providing better statistical data for dealing with possible future crises, continued work is needed to reach goals for comprehensive and transparent financial data, including foreign direct investments and exposures related to portfolio investment.
Moulton and van de Ven review the international standards and guidance, the progress made on each of these issues, and make recommendations for future steps. They consider the overall structure of the accounts and consider whether, given the current international standards, additional breakdowns and types of analysis would be helpful to explain economic developments. In addition, more fundamental modifications may be needed to more fully capture the economic activities of multinational enterprises, and they consider whether the standards need to be modified or extended to avoid the distortions caused by multinational enterprises that arrange cross-border intra-concern deliveries, the ownership and recording of knowledge assets and financial activities for purposes of tax avoidance. In doing so, the researchers weigh traditional needs of national accounts with emerging needs. Moulton and van de Ven also look into practical considerations that may hamper the introduction of certain proposals.

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Silke Stapel-Weber, Paul Konijn, John Verrinder, and Henk Nijmeijer, Eurostat

Meaningful Information for Domestic Economies in the Light of Globalization – Will Additional Macroeconomic Indicators and Different Presentations Shed Light? (NBER Working Paper No. 24859)

Globalisation presents significant statistical challenges, particularly for small and open economies in terms of measuring macroeconomic level and growth indicators and communicating the results in a meaningful way. In the aftermath of the so-called "Irish case," Eurostat with its partners in the European Statistical System is looking into how, within the existing accounting frameworks, additional indicators and presentations of the accounts that allow users to follow domestic and global developments could be conceived. The work takes account of recommendations which have been developed by a high level group in Ireland for improving insight into the Irish economy. However it goes beyond that, as any new indicator or breakdown, particularly in a European context, should be comparable across countries and not be seen as a GDP or GNI "a la carte" for each country to choose from under specific circumstances. Stapel-Weber, Konijn, Verrinder, and Nijmeijer present the findings of the respective European work streams to date in terms of methodology, indicators, building new statistical infrastructural elements and new cooperation models between statistical compilers. It invites a critical review of the suggestions put forward.

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Maria Borga and Cecilia Caliandro, OECD

Eliminating the Pass-Through: Towards FDI Statistics that Better Capture the Financial and Economic Linkages between Countries (NBER Working Paper No. 25029)

MNEs play a central role in the creation and management of complex production networks, but FDI statistics can also reflect other factors, such as fiscal optimisation to reduce tax burdens and the increasing sophistication in MNEs' capital structures. This can make it difficult to interpret FDI statistics, in the sense that they are not 'real' and no longer represent "long-term" investments in a country. Moreover, this behaviour can further obscure the ultimate source and destination of FDI. Borga and Caliandro propose a framework to produce consolidated FDI statistics based on the nationality of the MNE group. These statistics would be a complement to the residency-based FDI statistics. While residency-based financial statistics are useful to know where financial claims and liabilities are created and held, nationality based statistics provide information on who makes the underlying decisions, who reaps the benefits, and who takes on the risk and needs to hold sufficient capital to cover potential losses. These statistics would be useful for better measuring financial integration between economies and could also be used in conjunction with statistics on the operations of MNEs to analyse the relationship between the financing of MNEs and their operations. Rough estimates of the amount of pass-through capital in operating affiliates, rather than in SPEs, reveals that it is quite extensive, accounting for about one-third of the inward FDI positions in a selection of European countries. It also appears that pass-through capital is growing faster than 'real' FDI.

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Fariha Kamal, Bureau of the Census

A Portrait of U.S. Factoryless Goods Producers (NBER Working Paper No. 25193)

Kamal evaluates the Census Bureau's most recent data collection efforts to classify business entities in the U.S. economy that engage in an extreme form of production fragmentation called "factoryless" goods production. "Factoryless" goods-producing entities outsource physical transformation activities while retaining ownership of the intellectual property and control of sales to customers. Responses to a special inquiry on the incidence of purchases of contract manufacturing services in combination with data on production inputs and outputs, intellectual property, and international trade is used to identify and document characteristics of "factoryless" goods producing firms in the U.S. economy.

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Accounting for Global Production Processes

James J. Fetzer, Tina Highfill, Kassu Hossiso, Thomas Howells, Erich Strassner, and Jeffrey Young, Bureau of Economic Analysis

Accounting for Firm Heterogeneity within U.S. Industries: Extended Supply-Use Tables and Trade in Value Added using Enterprise and Establishment Level Data (NBER Working Paper No. 25249)

Fetzer, Highfill, Hossiso, Howells, Strassner, and Young present experimental trade-in-value added (TiVA) statistics estimated from extended supply-use tables (SUTs) for the United States for 2005 and 2012 that account for firm heterogeneity. The tables used to estimate the TiVA statistics extend supply-use tables for the United States by disaggregating the components of supply and use by multinational and other firms. The researchers also present preliminary output from microdata linking project between the U.S. Bureau of Economic Analysis (BEA) and the U.S. Census Bureau on the U.S. semiconductor and other electronic components manufacturing industry to show how different firm characteristics account for heterogeneity within industries in an extended SUT framework. The rise of global value chains has increased the importance of measuring trade on a value added basis and identifying trade by multinational enterprises when analyzing bilateral trade flows. The researchers' experimental results show that imported content of exports as a share exports varies notably by firm-type within most industries, and that the imported content of exports is concentrated in a few industries, the largest being petroleum manufacturing. In addition, they find that half of the domestic value added content of exports by foreign-owned U.S. businesses is in chemicals, motor vehicles, wholesale trade, and machinery and that most of this content is embodied in imports from upstream foreign affiliates. Estimates based on the researchers' microdata linking project suggest that production patterns by ownership, firm class size, and export intensity each exhibit firm heterogeneity to some extent. The ownership criteria best accounts for heterogeneity in the value added share of production among the three criteria, while firm class size accounts for heterogeneity in the export share of production better than the ownership criteria. However, the three criteria are highly correlated and the researchers make no attempt here to isolate the individual effects of each.

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Gabriela Saborio-Muñoz and Rigoberto Torres-Mora, Banco Central de Costa Rica

Costa Rica: Integrating Foreign Direct Investment Data and Extended Supply and Use Tables into the National Accounts
Chapter in forthcoming NBER book The Challenges of Globalization in the Measurement of National Accounts

Daily economic transactions are increasingly influenced by globalization, and there is growing demand for a better understanding of the impact of globalization within the economic accounts, and in particular its increasingly interconnected nature. This of course matters in all countries but in Costa Rica, which is a very open economy, the need to provide better evidence in this regard is more pressing than in many countries. Saborio-Muñoz and Torres-Mora highlight recent work carried out in Costa Rica to develop a set of Extended Supply-Use tables (E-SUT), under the auspices of the OECD Expert Group on Extended Supply and Use Tables, that have breakdowns by ownership structures, which are able to respond to many of these demands. Results show that the export industries with more propensity to create upstream domestic value added are those engaged in the exports of food and beverages and some services such as financial management, computing activities and research and development. Additionally, the researchers go further by describing efforts within the Costa Rican statistical information system, to develop fully integrated international economic accounts - in other words, mechanisms and frameworks to ensure coherent and consistent national accounts and balance of payments statistics as part of a strengthening of integrated economic accounts. The framework of the 2017 national accounts will incorporate in the integrated economic accounts the disaggregation necessary to explicitly show accounts associated with FDI.

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Bernhard Michel, Caroline Hambÿe, and Bart Hertveldt, Belgian Federal Planning Bureau

The Role of Exporters and Domestic Producers in GVCs: Evidence for Belgium Based on Extended National Supply-and-Use Tables Integrated into a Global Multiregional Input-Output Table (NBER Working Paper No. 25155)

Michel, Hambÿe, and Hertveldt introduce firm heterogeneity into Belgian supply-and-use and input-output tables by disaggregating manufacturing industries into exporters and non-exporters. As a further step, the resulting Belgian export heterogeneous input-output table is integrated into the global input-output table of the World Input-Output Database (WIOD). Based on these tables, the researchers test for differences in input structures and import behavior of exporters and non-exporters and analyse their integration into domestic and global value chains. According to their results, exporters and non-exporters in Belgian manufacturing industries are indeed different in terms of input structures and import behavior: the production processes of exporters are more fragmented, in particular internationally. This result confirms prior findings in the literature on firm heterogeneity in international trade. Regarding the roles of exporters and domestic firms in global value chains (GVCs), the researchers find that Belgian manufacturing exporters participate in GVCs mainly through their purchases of imported intermediate inputs for producing exports (backward integration), while domestic producers participate in GVCs mostly through deliveries of intermediate inputs for export production (forward integration).

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Bart Los and Marcel Timmer, University of Groningen

Measuring Bilateral Exports of Value Added: A Unified Framework (NBER Working Paper No. 24896)

Los and Timmer provide a unified framework for measuring the domestic value added content of bilateral exports. They outline a general methodology that encompasses the well-known measures introduced by Koopman et al. (2012) (domestic value added in exports) and Johnson and Noguera (2012) (value added consumed abroad) which the researchers refer to as VAX-D and VAXC. In addition they suggest a novel third measure, VAX-P, that indicates the value added absorbed abroad in the final stage of production. The researchers show how the measures are related and can all be derived with the method of hypothetical extraction in a general input-output model outlined in Los et al. (2016). In addition they show that for VAX-C and VAX-P the sum of bilateral measures is equal to the corresponding unilateral measure, but this is not necessarily true for VAX-D. Los and Timmer illustrate all measures with some numerical examples using the World Input-Output Database.

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Nadim Ahmad

Accounting for Globalisation: Frameworks for Integrated International Economic Accounts
Chapter in forthcoming NBER book The Challenges of Globalization in the Measurement of National Accounts

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Impact of Transfer Pricing and Tax Avoidance

Mark Vancauteren, Hasselt University, and Michael Polder and Marcel van den Berg, Statistics Netherlands

The Relationship between Tax Payments and MNE's Patenting Activities and Implications for Real Economic Activity: Evidence from the Netherlands
Chapter in forthcoming NBER book The Challenges of Globalization in the Measurement of National Accounts

Vancauteren, Polder and van den Berg analyze the role of innovation in explaining tax payments using panel data analyzing patent active firms located in the Netherlands for the period 2000-2010. They estimate a model that looks at either the number of patent counts or the number of patent citations on tax payments. The results suggest that the coefficients on both the number of patent applications and patent citations enter the model negatively. Their model also suggests that the number of patent applications or citations per R&D euro invested is also negative. After some sensitivity checks, the researhers find that these results are not affected when they consider sample selection and dynamics. In addition, their results reveal that the negative tax effect from patenting is merely driven by Dutch firms while foreign MNEs firms with higher investments in R&D pay lower taxes. As it is clear from these first results, this may reflect a limitation in the extent that firms in the Netherlands separate income from real innovative activity. To put some more emphasis on thus suggestive result, we also investigate to what extent innovating firms are actually embedded in real economic activities. Vancauteren, Polder and van den Berg explore the role of both the Dutch patent box regime and the R&D tax credit that is put in place. Using a labor productivity analysis, weighted by employment, for the period 2011-2015, they find that these measures appear to have a productivity augmenting impact. Overall, their results suggest that the reallocation of income from innovation capital, which to a certain extent can be driven by beneficial tax schemes, does not seem to be interfere with real economic activities.

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Derrick Jenniges, Raymond Mataloni Jr., Sarah Stutzman, and Yiran Xin, Bureau of Economic Analysis

Strategic Movement of Intellectual Property within Multinational Enterprises
Chapter in forthcoming NBER book The Challenges of Globalization in the Measurement of National Accounts

Strategic behavior by U.S. multinational enterprises (MNEs) to shift profits between countries to reduce their worldwide tax burden has been well studied. Much of the existing research has focused on the use of debt payments and intrafirm intellectual property licensing agreements to explain why and how MNEs shift income across national borders. Although these tax strategies may become less important following the U.S. Tax Reform Act of 2017, there is evidence they have had a large impact on measures of economic activity in recent years. Jenniges, Mataloni Jr., Stutzman, and Xin explores how U.S. MNEs have used cost sharing agreements between U.S. parent companies and their foreign affiliates to shift profits to lower tax jurisdictions. The results are consistent with the researchers' hypothesis that having a cost sharing agreement is associated with lower profitability for U.S. parents and higher profitability for foreign affiliates. The results provide a microeconomic view of how strategic movement of intellectual property affects key measures in the national and international economic accounts, such as GDP and the trade balance.

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Jennifer Bruner and Dylan Rassier, Bureau of Economic Analysis; and Kim J. Ruhl, Pennsylvania State University

Multinational Profit Shifting and Measures throughout Economic Accounts (NBER Working Paper No. 24915)

Profit shifting to low-tax countries imposes challenges for the treatment of multinational enterprises in economic accounts. Using adjustments for profit shifting calculated in Guvenen et al. (2017) under an alternative measurement methodology, Bruner, Rassier, and Ruhl empirically demonstrate how the effects of profit shifting cascade throughout a fully articulated set of economic accounts for the United States in 2014. They find a 1.5 percent and 3.5 percent increase in measured U.S. gross domestic product and operating surplus, respectively, and a 33.5 percent decrease in measured income receivable from the rest of world. As a result of offsetting effects, measured U.S. gross national saving decreases by 0.8 percent, and national borrowing increases by 6.9 percent. There are also potentially significant implications for analytic uses of the measures, including decreases for the labor share of income and the return on U.S. direct investment abroad of 1.4 to 2.4 percentage points and 4.3 percentage points, respectively, and increases for the trade in services balance as a percentage of GDP and the return on domestic non-financial business of 1.4 percentage points and 1.3 percentage points, respectively.

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Accounting for the Impact of Globalization in Europe

John D. FitzGerald, Trinity College Dublin

National Accounts for a Global Economy: The Case of Ireland
Chapter in forthcoming NBER book The Challenges of Globalization in the Measurement of National Accounts

Globalisation is affecting the way economic activity is reflected in the national accounts. Intellectual property, which is now part of the capital stock, interacts with the choice of global firms as to their legal structure, producing different national accounting outcomes for individual countries. This is but one manifestation of the challenges that a global economy presents for national accounting. Using the example of Ireland, consideration is given to the data needed to meet the needs of users of national accounts. In particular, more information is required to separately identify all the activity of multinational enterprises and domestically owned firms. FitzGerald suggests a set of satellite accounts for Ireland that would show how changes in the economy affect the economic welfare of Irish residents.

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Sebnem Kalemli-Ozcan, University of Maryland and NBER; Bent Sorensen, University of Houston; Carolina Villegas-Sanchez, ESADE Business School; and Vadym Volosovych, Erasmus University Rotterdam

Who Owns Europe's Firms? Foreign Investment in Europe and Implications for Risk Sharing

Kalemli-Ozcan, Sorensen, Villegas-Sanchez, and Volosovych investigate foreign direct investment (FDI) in 24 OECD and 13 non-OECD European countries, using a firm-level dataset for the years 1999-2012. Their data set is bilateral at the micro-level -- that is, for each firm, they observe the amount of foreign equity investment over time, together with the identity of direct and ultimate foreign investors. They aggregate their firm-level foreign direct investment data according to destination and origin country and compare to the aggregate FDI statistics from OECD and the IMF. The researchers find these official statistics overstate "real" FDI and these statistics also do not identify the countries of the ultimate investors correctly. Their "aggregated" micro data shows much lower and stable levels of FDI. They also find that, their aggregated data assigns a significant portion of within Europe FDI to North America so that American and Canadian investors are the ultimate foreign investors. These findings have implications in terms of risk sharing both within Europe and between Europe and the rest of the world.

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Globalization and Innovation/Productivity

Mark de Haan and Joseph Haynes, Statistics Netherlands

R&D Capitalisation: Where Did We Go Wrong?
Chapter in forthcoming NBER book The Challenges of Globalization in the Measurement of National Accounts

Globalisation and the activities of multinational enterprises (MNEs) present an increasing challenge for macroeconomic measures particularly those designed to reflect domestic economies. The very presence of MNEs goes against the basic idea of there being an identifiable and measurable domestic economy consisting of domestic consumers and producers. In a globalised world with limited to no trade barriers, MNEs will operate across multiple national economies, often under a single management or control structure. One of the serious problems that MNEs present for macroeconomic measurement is the issue of assigning economic ownership of Intellectual Property (IP) to the various fractions of a global value chain and therefore to domestic economies. This is an issue for which the international guidance is currently incomplete and still under research by national accountants. De Haan and Haynes an attempt to contribute to the discussion of R&D capitalisation by establishing a bridge between the micro and macro worlds. This translation of information on the MNE's business structure to the National Accounts framework will give an indication of real world distortions that national accountants will encounter when measuring the activities of MNEs on a domestic economy basis. By looking at the issue from the perspective of the entire global MNEs activities, rather than from the fractional views as exposed by domestic economy level data, the researchers aim to provide new input into the discussion on how economic ownership of IPs should be understood in a future version of the SNA.

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Fernando Galindo-Rueda and Daniel Ker, OECD, and Francisco Moris and John Jankowski, National Science Foundation

Capturing International R&D Trade and Financing Flows: What Do Available Sources Reveal about the Structure of Knowledge-Based Global Production?
Chapter in forthcoming NBER book The Challenges of Globalization in the Measurement of National Accounts

Galindo-Rueda, Ker, Moris, and Jankowski investigate available statistical evidence for OECD countries on the extent and nature of R&D globalisation based on three inter-related domains: services trade, activities of multinational enterprises (MNEs) and R&D performance and funding. This paper presents a first broad-ranging view on R&D globalisation measurement based on new or recently updated international statistics manuals across the three statistical domains, highlighting the major conceptual and practical implications arising from the methodological changes. The descriptive empirical analysis emphasizes the importance of compiling and contrasting various statistics about knowledge-based assets, incorporating sources which are specifically designed to map the creation and funding of R&D, as well as different notions of ownership over its outcomes. The paper concludes by highlighting a range of possible actions to help develop a more comprehensive understanding of the role of R&D funding, performance, exchange, and use decisions in global production and innovation networks.

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