Services are delivered to international markets through two distinct channels. The first channel of delivery is cross-border transactions in services that are sold by residents of one country to residents of another country. These transactions include intrafirm trade by multinational companies and trade between unaffiliated parties. The full amounts of these transactions are recorded directly in the current account of 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 through 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 by balance-of-payments-accounting convention, 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.
Although conceptually distinct, both channels may sometimes be involved in the delivery of a particular service. For example, an affiliate might sell services abroad, but the affiliate's parent does some of the work and bills the cost to the affiliate. In this case, the amount received by the affiliate from the foreign customer would be recorded under sales by affiliates, and the funds received by the parent from the foreign affiliate for its share of the work would be recorded in cross-border transactions as intrafirm trade between parents and affiliates. However, because the parent's receipts would be recorded under both channels—directly in the cross-border transactions and implicitly embodied in the sales by affiliates—the data for the two channels cannot be regarded as free of duplication 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 through 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, most importantly, compensation of employees—accrues to foreigners.
Notwithstanding these differing economic impacts, the channel of delivery is often largely predetermined by the nature of the service rather than by a choice between equally viable alternatives. For example, travel services are inherently cross-border in nature; 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. Some services can be delivered equally well through either channel, but they are the exception rather than the rule. Overall, a majority of U.S. sales of services to foreigners appear to have been delivered through cross-border transactions in recent years (data on bank affiliate sales are not available), whereas a majority of U.S. purchases of services from foreigners have been from the foreigners' affiliates located in the United States. %%put this set of coding where you want the first column to end
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; 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 "Alternative Frameworks for U.S. International Transactions," SURVEY 73 (December 1993): 50–61; and "An Ownership-Based Disaggregation of the U.S. Current Account, 1982–93," SURVEY 75 (October 1995): 52–61.