Attachment 3

Attachment 3

C. FRITZ FOLEY

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ASSISTANT PROFESSOR

May 10, 2007
David H. Galler
Chief
Direct Investment Division
Bureau of Economic Analysis
Dear Mr. Galler,
I am writing to reply to three letters I have received from you recently, each asking for my views concerning
the design of BEA surveys. I have broken out my views into three parts below, each part responding to one of
your letters.

Proposed Changes to the BE-12 Survey
In your letter dated April 30, 2007, you asked me to provide you with my comments and suggestions
concerning the proposed changes to the benchmark survey of foreign direct investment in the U.S. I support
most of the proposed changes, but I have one major objection and a few suggestions.
My biggest objection to the proposed changes relates to the proposal to increase the reporting thresholds. The
increase in these thresholds that has occurred over the last ten to fifteen years has dramatically decreased the
amount of data firms are required to report and therefore threatens the value of the BEA data. Changes in the
requirements concerning which firms must report which data items has also contributed to this decline. I
therefore would suggest that the reporting requirements not be changed.
In 1992, all U.S. affiliates with sales, assets or net income with an absolute value in excess of $1 million filled
a complete data form. The proposed changes to the survey would raise this threshold to $40 million. Proposed
requirements for reporting data on the long form data are also far too high. I believe that the long form was
only introduced within the last fifteen years—prior to that all companies effectively filed all the information
captured on the long form. Since its introduction, thresholds have grown in a way that has significantly
reduced the sample of firms that report details of their financial and operating activity.
These changes have the potential to destroy the value and accuracy of many aspects of the BEA data. While
BEA may be able to claim that, on a value weighted basis, a large fraction of multinational activity is studied
in detail, these changes undermine our understanding of activity in many countries, industries, and types of
firms. Multinationals in smaller countries and in industries without significant economies of scale will not be
covered well by the BEA data. Certain data items in country/industry cells could also be misleading if there
are lots of small affiliates that do not report the item.
Under the proposed changes, it is only possible to track a few data items through time for smaller affiliates,
thus limiting the value of research using the firm level data. Researchers will not be able to perform detailed

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G E O R G E F. B AK E R F O U N D AT I O N

studies of how changes in the international economic environment and policy changes affect firm operating
and financial decisions using large samples if reporting thresholds continue to increase.
It does not make sense to me that BEA should reduce coverage of multinational firms at the same time that
information on multinationals is of increasing importance to academics, policy makers, and business leaders.
If it has been difficult for BEA to obtain the resources needed to maintain the accuracy and completeness of the
data, I wonder if BEA data users could help decision makers understand the value of these data. I am happy to
discuss this possibility with you.
I have some other suggestions concerning the proposed changes as well. I would not double the threshold for
reporting merchandise trade on the BE-12(LF) form. Although these data have not been widely used by
researchers, they are unique, and I believe that researchers will use them extensively in the future. I would
suggest leaving this threshold at $500 thousand.
I would suggest collecting information on capital expenditures in Part I of the short form and on the BE-12
Mini form. Offshoring issues relate not just to where employment is located, but also to where capital is
invested, so capturing this item for smaller affiliates is crucial.
I would also suggest collecting information on dividends in Part I of the short form and on the BE-12 Mini
form. Dividend repatriations are a significant flow of funds out of and into the U.S. and have been the subject
of considerable academic and policy interest over the last two decades. For example, the American Job
Creation Act of 2004 temporarily reduced the taxes the U.S. charges on earnings repatriated to the U.S. As
debates about how multinational firms should be taxed continue, it will be useful to have information on the
dividends paid by U.S. affiliates to inform the debate.

Shipped versus Charged Basis for Trade Data
In your letter dated May 3, 2007, you explain that there is a proposal to report trade data on a charged as
opposed to a shipped basis. I do not support this proposal, and I would advise you to continue to collect and
report trade data on a shipped basis. I do appreciate that tracking and providing data on a shipped basis is
costly for firms and BEA. I think this argument is the strongest one for changing reporting. However, I
believe that BEA’s trade data are of more value to current research efforts in international economics if they
are reported on a shipped as opposed to charged basis. Let me explain my view on this.
Studies of transfer pricing that make use of the BEA data tend to focus on how foreign taxes affect levels of
reported income (see Hines and Rice (1994) or Desai, Foley and Hines (2004a)), levels of investment and
economic activity, and the use of different factors of production(see Desai, Foley and Hines (2004b). It would
be helpful to have trade data on a charged basis if data on a shipped basis were also collected, or if trade data
provided details not just on values but on prices and quantities. This kind of data would allow a researcher to
see if firms shift profits to low tax locations. I do not believe that simply knowing where traded goods are
charged will allow one to make much headway. Asking for additional details for trade data would create
additional burden for reporters, so I do not think it is feasible.
Studies concerning how ownership patterns affect trade and how endowments affect trade rely on having trade
data that is reported on a shipped basis. For example, consider Antras (2005). Antras (2005) empirically
documents and theoretically explains patterns in the share of intrafirm trade by industry. For his study, Antras
must be able to compare levels of intrafirm trade with levels of total trade. He uses the BEA data and relies on
the fact that these data and the Census data are both reported on a shipped basis. The literature on the impact
of factor endowments on trade also relies on knowing where traded goods are going to and coming from as
opposed to who is paying for them.
In short, I believe that trade data are more valuable to researchers if they are collected on a shipped as opposed
to charged basis. If reporting burdens are a major concern, I wonder if it would be possible to try to coordinate

data collection efforts with the U.S. Census Bureau and the U.S. Customs Bureau. If it were possible to
coordinate data collection efforts, reporting burdens for companies might fall and the accuracy of the data
might improve.

Covering Banks in the Annual BE-11 Survey
In your letter dated April 12, 2007, you indicated that BEA intends to cover bank U.S. parents and their bank
and nonbank affiliates in future Annual Surveys of U.S. Direct Investment Abroad. I think this is a great idea.
I have not seen much academic research that studies the BEA data on multinational banks, and this may in part
be a consequence of the fact that data are only available for certain years. I do have a few suggestions on the
reporting requirements and the data collection form.
For nonbank affiliates, I wonder why BEA would not ask bank parents to file the same BE-11A, BE-11B, and
BE-11C forms subject to the same reporting requirements as other multinational parents. It seems to me that
an affiliate in a manufacturing industry with a parent in banking should file the same information as any other
affiliate in manufacturing.
If nonbank affiliates filed these forms, this would provide more flexibility to design a BE-11B(BNB) annual
survey form specifically for bank affiliates. In the proposed BE-11(BNB) form, I am not sure how a bank
would fill out item number 40 which captures information on sales by location since deposit taking entities do
not really have sales. For nonbank affiliates, the $500 million reporting threshold also seems so high that very
few of these affiliates will report any data.
Thinking about banking data raises another issue for me. My understanding is that private equity firms are
increasingly making international investments that would trigger their being classified as multinational parents.
I do not think they would be classified in industry 5221, so I do not think these kinds of firms are affected by
the proposed changes concerning bank parents. However, I hope that BEA is capturing their international
activity on an annual basis.
Finally, in order to address reporting burdens and to improve the accuracy of the data, I would encourage BEA
to try to coordinate their data collection efforts with the efforts of the Federal Reserve Board. I do not know
the details of what the Federal Reserve Board does in the sphere of international banking, but I do know that
they report data on the foreign activities of U.S. banks, and I wonder if there would be gains from working
more closely with officials based there.

In conclusion, thank you for asking my views on these issues. I have a deep respect for all of the hard work
that you and others at BEA do to collect and analyze data about our economy. I appreciate the support that
BEA has given me in my research, and I hope that you find my suggestions and comments to be helpful.
Sincerely,
C. Fritz Foley

References
P. Antras, “Firms, Contracts, and Trade Structure,” Quarterly Journal of Economics (2003)y 1375-1418.
M.A. Desai, C. F. Foley and J. R. Hines Jr., “The Costs of Shared Ownership: Evidence From International
Joint Ventures,” Journal of Financial Economics (2004a) 323-374.

M.A. Desai, C. F. Foley and J. R. Hines Jr., “Foreign Direct Investment in a World of Multiple Taxes,”
Journal of Public Economics (2004b) 2727-2744.

J. R. Hines Jr., and E. M. Rice, “Fiscal paradise: Foreign tax havens and American business,” Quarterly
Journal of Economics (1994) 109:149-182.

From: [email protected] [mailto:[email protected]]
Sent: Tuesday, May 15, 2007 10:22 AM
To: Galler, David
Cc: [email protected]
Subject: Comments on new FDIUS Survey forms
Dear Dave,
Karen Laney-Cummings has passed your requests for comments on to me, as the person in our office who
deals most directly with the BEA investment data. It’s a pleasure to hear from you after all this time, and I
hope you’re doing well.
The following comments apply to both your letter of April 12, 2007, seeking comments on the inclusion of
bank parents and their affiliates in the annual surveys, and your letter of April 30, 2007, seeking comments
on the 2002 benchmark survey.
Regarding the revisions to the BE-11 Annual Survey form, I am particularly pleased to see that you will be
including banks and their affiliates in your annual surveys. I agree that the lack of data on bank parents and
their affiliates has been a significant gap in existing BEA annual data. However, I would question the high
exemption level of $500 million for bank affiliates, compared to what appears to be an exemption level of
$150 million for non-bank affiliates on the BE-11 instructions enclosed with your letter. I’m concerned
that we would be missing important information for smaller institutions. Is it your understanding that the
higher exemption level for banks will lead to the same share of overall affiliates reporting? Do you have
plans to include bank and their affiliates in the FDIUS annual surveys as well?
Regarding the benchmark survey, I’m quite pleased to see that you will be adding additional information on
services transactions and R&D to the surveys. We make extensive use of this information, and we’re
looking forward to the additional detail. I am particularly pleased to see the additional detail you will be
requesting on the activities of banks and bank holding companies, which seem likely to yield significantly
greater insight into the these firms’ activities.
I am concerned that by raising the exemption criteria, we will be losing valuable information about smaller
affiliates. While I understand that there is an issue of the reporting burden on small companies, these
companies can be quite an important and dynamic segment of the U.S. economy, and by exempting these
affiliates, it is not possible to tell what is missing from the data.
I don’t have any serious objections to the other items that will be dropped from the forms.
We appreciate the opportunity to comment on the changes to your survey forms. I look forward to
continuing to work with BEA in the future.
Best regards,
Laura
Laura S. Bloodgood, Ph.D.
Sr. International Trade Analyst for Investment
U.S. International Trade Commission
(202) 708-4726
[email protected]

From: Pilot, Adrienne T. [mailto:[email protected]]
Sent: Wednesday, May 16, 2007 1:32 PM
To: [email protected]
Cc: Galler, David
Subject: Benchmark Survey of Foreign Direct Investment
Dr. Slaughter,
BEA recently notified CEA of proposed changes to the benchmark survey of foreign
direct investment in the US. Comments are due Friday 5/18. Rob Martin reviewed the
material provided by BEA, but had no comments; he thought the proposed changes
looked reasonable. Although you are no longer with CEA, Steve Braun thought you may
be interested in reviewing the proposed changes.
There are no attachments to this email because the material provided by BEA is paper
rather than electronic. Copies of the surveys and instructions should be available online.
If you would like to review and comment on the proposed changes, I could scan the letter
and short paper BEA sent and email it to you, or you could contact BEA directly and
request material electronically. You can reach David Galler, BEA’s Chief of the Direct
Investment Division, at:
[email protected]
202-606-9835
Please do not hesitate to contact me if you have any questions.

Sincerely,

Adrienne Pilot
Director of Statistical Office
Council of Economic Advisers
202-395-5110
[email protected]

From: Lipsey, Robert
To: Galler, David
Sent: Thu May 17 18:02:31 2007
Subject: B-12 Benchmark Survey of FDI in the US
Dear Mr. Galler,
I have looked at the proposed changes in the B-12 form and have a few comments,
unfavorable as usual.
With respect to the discontinuance of the collection of merchandise trade by product, I
cannot claim that trade by product data have been much used in research, even by me in
my two papers dealing with trade. I think the reason is that the trade classification is so
broad that it is already difficult to compare with trade data in a useful way. On the other
hand, I find it hard to believe that the affiliates find this section impossible to answer,
given the broadness of the classification. Someone in the affiliate has had to fill out
forms describing exports, at least, in a lot more detail than this. And someone in the
affiliate must know the composition of imports at this level. Of course, the ideal solution
would be for researchers to be able to match the BEA forms with the Census Bureau’s
detailed trade data.
I worry more about the dropping of questions on service transactions between U.S.
affiliates and their affiliated foreign group and their transfer to the BEA’s surveys of
cross-border service transactions. The problem with that transfer is that while the totals
of these trades will be collected, the relationships with other activities of the same
affiliates will be lost. I have found in my studies of service trade of US –owned affiliates
that these connections between the service trades of affiliates and the merchandise trade
and other activities of the same affiliates are extremely important in understanding
service trade. A lot of information would be lost if that connection disappeared from the
BEA Benchmark data.
Sincerely,

Robert E. Lipsey
Director, New York Office
National Bureau of Economic Research
365 Fifth Avenue, Suite 5318
New York, NY 10016-4309
Tel: (212) 817-7961 / 7955
Fax: (212) 817-1597
[email protected]

From: [email protected] [mailto:[email protected]]
Sent: Friday, May 18, 2007 6:22 PM
To: Galler, David
Cc: [email protected]; [email protected];
[email protected]; [email protected]
Subject: Commerce OMA comments on BEA benchmark survey design
Dear Mr. Galler:
Thank you for the opportunity to comment on the design of the BEA benchmark survey
of foreign direct investment. We appreciate your efforts to revise the BE-12 forms in
order to improve collection of important data on investment.
The Office of Multilateral Affairs at the Department of Commerce is particularly
interested in statistics on trade in services and we applaud changes to the benchmark
forms that will help to identify companies that engage in cross-border services. We
would be pleased to work with you however possible towards a fuller understanding of
services transactions; please keep us apprised of updates or new initiatives in this area.
Thank you.
Sincerely,
Jeff Kozlowicki
International Trade Specialist
Office of Multilateral Affairs
Trade Agreements & Compliance
U.S. Department of Commerce
Tel 202.482.3681
Fax 202.482.5939

From: Ronald Fecso [mailto:[email protected]]
Sent: Tuesday, May 22, 2007 6:47 PM
To: Galler, David
Subject: Fwd: BE-12 revisions
Once again, thank you for providing GAO with an opportunity to comment on proposed
revisions to one of your surveys - the BE-12.
As before, I've called attention to the proposals to various persons and groups within
GAO for consideration focusing on any current or anticipated engagements for which the
changes might materially impact our work.
In this perspective, we have no objections to the proposed changes.
Thanks again for soliciting our input.
Best wishes for the remaining activities in carrying out the proposed changes.
Regards,
Ron Fecso
Chief Statistician
U.S. Government Accountability Office
room 6K17
441 G Street, NW
Washington, DC 20548
202-512-7791
[email protected]

Susan Feinberg

www.business.rutgers.edu

Associate Professor

[email protected]

Department of Management and Global Business
Management Education Center, Room 304

973-353-5297

Rutgers Business School–Newark and New Brunswick

www.susanfeinberg.com

Rutgers, The State University of New Jersey
111 Washington Street
Newark, NJ 07102

May 25, 2007
David Galler
Chief, Direct Investment Division
Bureau of Economic Analysis
United States Department of Commerce

Dear David,
Please see my comments below in response to your letter of April 30th regarding proposed changes
to the Benchmark Survey of FDIUS. I should start by saying that I’ve never worked with the IFDI
data before – I’ve only used the USDIA data. I also generally use the Annual Surveys and do not
typically make use of the extra data collected in Benchmark years. So I’m considerably less familiar
with these surveys. However, some of the issues raised in your letter and the attachment also seem
quite relevant to the USDIA data, so I’ll comment briefly on them here.
I’ll address what I view as the most important issue first – the proposed creation of the BE-12 Mini to
be completed by small US affiliates. As I’m sure you know, an interesting feature of US
multinationals from the USDIA (and US parent) data is that the distribution of MNC size (as
measured by, e.g., a US parent’s total number of affiliates, or total foreign sales) tends to be bimodal.
There are many small MNCs, and approximately 15% of the population of MNCs are very large
firms. Similarly, there are also many small and some very large foreign affiliates of US MNCs. We
know very little about how MNCs grow over time and whether, for example, the small MNC
affiliates in 1983 have tended to stay small or grow large. These questions have obvious policy
implications for both developing countries that are recipients of inward FDI, and for the US and
other industrialized countries like Canada that are significant FDI host countries. Answering these
questions would mean collecting more reported (not estimated) data on small affiliates, at the very
least, in Benchmark Survey years. This would allow us to understand whether and how the small
affiliates in the left tail of the distribution eventually grow to become larger affiliates toward the
right tail of the distribution.
Understandably, to reduce the reporting burden on firms, the BEA sets size criteria for reporting,
hence the proposed creation of the BE-12 Mini. The problem is, the size criteria result in
systematically worse data quality (or lack of sufficient reported data altogether) on smaller entities.
Thus, it is extremely difficult, using only reported data, to study the growth of MNCs.
I think the idea of having the “Mini” form that small and exempt affiliates complete is excellent.
However, I would probably eliminate the tiers in order to gather needed additional data on small
affiliates, and I would also suggest adding a few more items.
1 – I would put in enough data to allow for the construction of the gross product of small affiliates
2 – I would add PPE and PPE expenditure data
3 – I would add questions 115 and 126 from the import and export grid in Part II of the Long Form (I
would also add these to the Short Form). Note that I would only include the totals – not the trade by

product.
I understand that #3 above might be less realistic, but I don’t think that the reporting burden of #1
and #2 would be very difficult, given these are data many affiliates are likely to have fairly easily
available. It seems to me that, in general, reporting requirements are onerous only to the extent that
entities are being asked for data they might not collect in a similar format themselves. If they’re just
being asked to fill in questions pertaining to data they already have on hand, I wouldn’t think this
should pose too much of a burden.
Many of the other proposed changes – particularly the deletions such as discontinuing the collection
of merchandise trade by product – do pertain to data affiliates are not likely to have readily
available. As indicated in your letter, since these data are not widely used by researchers and are
often left blank by firms, so it’s hard to argue that BEA should continue to collect them.
I agree with all the recommendations for changes detailed on page 2, parts II and III of Attachment
A. My only concern is the following. I do not know anything about the sampling procedure for the
BE-120, BE-125 and BE-185, so I’m not sure whether all of the same entities are being asked to fill out
these forms in addition to the relevant BE-12’s. If so, then the proposed deletion of the questions
pertaining to transactions in services seems reasonable. If not, however, and only a fraction of
affiliates that complete the BE-12 are asked to fill out these other surveys, then it might be better to
keep these questions in the various BE-12’s.
All the proposed changes to the BE-12 Long Form on page 3 of Attachment 2 strike me as reasonable
and not likely to compromise the data. Regarding the proposed changes to the BE-12 Short Form at
the bottom of page 3 of Attachment 2, I would change item 10 (the first point). I would add items to
collect both imports and exports of goods, services and investment income in a grid similar to that in
Part II questions 115 and 126 on the Long Form. I agree with all the other recommended changes to
the Short Form.

I also agree with the proposed additional items to be added to the BE-12 Mini, as described on
page 5. As discussed earlier, I suggest adding to these the 3 additional data items I mentioned
above (gross product data, PPE and trade).
Thank you very much for allowing me to comment on these proposed changes to the BE-12’s. I
hope to use this data someday! I look forward to meeting you over the Summer. Please feel
free to contact me again if you have any other questions. I won’t be coming in to my New
Jersey office very often during the Summer, so my home address is probably better for reaching
me. I’ve noted it below.
Sincerely,

Susan Feinberg
Home address:

4341 Chesapeake Street NW
Washington, DC 20016