Services are sold in international markets through two distinct channels. The first channel is cross-border transactions in services that are sold by residents of one country to residents of another country. These transactions consist of both trade within multinational companies (intrafirm trade) and trade between unaffiliated parties. They are recorded in the international transactions accounts of both countries—as exports of services by the seller's country and as imports by the buyer's country.
The second channel of delivery is sales by affiliates of multinational companies, which from the U.S. viewpoint, are sales to foreigners by foreign affiliates of U.S. companies or U.S. purchases from other countries' U.S. affiliates. These sales are not considered U.S. international transactions because, under the residency principle of balance-of-payments accounting, affiliates of multinational companies are regarded as residents of the countries where they are located rather than of the countries of their owners. Thus, sales abroad by foreign affiliates are transactions between foreign residents, and sales in the United States by U.S. affiliates are transactions between U.S. residents. However, the direct investors' shares of the profits earned on these sales are recorded as U.S. international transactions.
Since 1986, a majority of U.S. sales of services to foreigners appear to have been delivered through cross-border transactions (data on bank affiliate sales are not available), but sales for the two channels were about equal in 1996. In contrast, since 1989, a majority of U.S. purchases of services from foreigners have been from the foreigners' affiliates located in the United States.
Both channels may sometimes be involved in the delivery of a particular service. For example, if an affiliate sells services abroad and if the affiliate's parent does some of the work and bills the cost to the affiliate, the amount received by the affiliate from the foreign customer is recorded under sales by affiliates, and the funds received by the parent from the affiliate for its share of the work is recorded as intrafirm trade in cross-border transactions. However, because the parent's receipts are recorded under both channels—directly in the cross-border transactions and implicitly embodied in the sales by affiliates—the data for the two channels may be duplicated and therefore cannot simply be added together./1/
The two channels of delivery typically differ in their effect on an economy. For example, U.S. cross-border exports usually have a greater effect on the U.S. economy than the otherwise equivalent sales through foreign affiliates, because most or all of the income generated by the production of the services generally accrues to U.S.-supplied labor and capital. In contrast, for sales by foreign affiliates, only the U.S. parent company's share in profits accrues to the United States (and is recorded as a U.S. international transaction); the other income generated by production—including compensation of employees—accrues to foreigners.
Some services can be delivered equally well through either channel, but the channel of delivery is often largely predetermined by the nature of the service. For example, travel services are inherently delivered through the cross-border channel; in contrast, many business, professional, and technical services are delivered mainly through the affiliate channel because of the need for close and continuing contact between the service providers and their customers.
For specific services, the relative importance of the two channels is difficult to gauge because the available data on U.S. cross-border transactions are generally classified by type of service, whereas the data on sales of services by affiliates are classified by primary industry of the affiliate. The difference in classification reflects BEA's effort, in designing its direct investment surveys, to strike a reasonable and appropriate balance between the needs of data users for detailed data and the concerns of respondents about the burdens imposed. A disaggregation of affiliate sales by type of service would be useful, but this detail would add significantly to the burden imposed on respondents.
Footnotes:
1. At an aggregate level and for transactions in goods as well as in services, BEA has provided a duplication-free economic-accounting framework for integrating data on cross-border trade with data on sales by affiliates; however, because of differences in the basis of classification and for other technical reasons, this framework cannot be extended to the level of detail reflected in this article. See J. Steven Landefeld, Obie G. Whichard, and Jeffrey H. Lowe, "Alternative Frameworks for U.S. International Transactions," SURVEY OF CURRENT BUSINESS 73 (December 1993): 50–61; and Obie G. Whichard and Jeffrey H. Lowe, "An Ownership-Based Disaggregation of the U.S. Current Account, 1982–93," SURVEY 75 (October 1995): 52–61.