Multinational Enterprises Practical issues. The reason for -Measurability problems -Inconsistencies in source statistics -Need for guidelines

Multinational Enterprises

Practical issues

The reason for

-Measurability problems

-Inconsistencies in source statistics

-Need for guidelines

Catch words

-Measurability

-Consistency-Tailor-made solutions -Territorial principle (SNA/ESA)

Measurability

-Dramatic increase in flows of goods and services between:

* a national economy and the rest of the world

* worldwide affiliates of enterprises

- Larger statistical problems limiting the national economy

- Problems in measurement and valuing goods, services and financial flows

Measurability

-Due to globalization the legal ownership of goods can simply pass from a resident unit to a non-resident unit-Criteria such as the ownership of goods and the steering of production processes are ‘old fashioned’-In less than no time the entire production process can switch to another country-Consequences for the concept of ‘resident production unit’ and for the attribution of gross value added to the various countries

Consistency

Of vital importance: internal and mutual consistency of statistics

-NA: the transaction identity supply = demand production + imports = exports + interm. cons. + final consumption (incl. change in stocks)-Consistency between production account and the rest of the sector accounts-Consistency between the descriptions in the NA and the sources-Consistency between the registration in the national (Dutch) and international accounts-Consistency in observation and description (adjustments!)

MNE’s: Frequently occurring cases

1. Demarcation of a foreign affiliate

2. Cost calculations within the enterprise (transfer pricing in principle at market prices)

3. Production versus industrial services

4. Legal ownership via Netherlands, commodity flows around Netherlands or vice versa

Summary and conclusions

1. SNA and ESA do not offer solutions for all problems. Frequently tailor-made-solutions. Measurability problems.

2. Demand of consistency of statistics in observation and description (including adjustments).

3. SN’s strategy: focus on following actual developments. Rapid changes in international relations: statisticians run the risk of being overtaken by developments.

Summary and conclusions

The territorial principle is the basic assumption used.

-GDP is the result of production activities of resident units-An exhaustive description of international trade flows of goods and services is essential

Classification examples

-Substantial expenses recharged, transfer prices (Fiasco)

-Production versus industrial services (Chempion, T-Ford)

-Deconsolidation, demarcation of a foreign affiliate (Logic)

Fiasco System International Ltd.

-Producer of hardware and software, supports computer networks.

-Central sales office established in the Netherlands

-Assembly plants located abroad

-Conform Business Register part of wholesale trade.


Relevant source statistics for NA:-Production Statistics-Statistic of Finances of Non-financial Enterprises

-Labour Market Statistics-International Trade Statistics -Balance of Payments (income transactions)


What is the problem?- A huge increase of turnover in Year T resulting in a substantial contribution to GDP-growth of 0.3%-point.


A problem arises about transfer prices:-According to additional information the selling expenses consist of wages (70) and expenses charged of group companies (780) at cost price, whereby in practice the (foreign) group companies do not have any profits.

-Attribution of total operating income to the Netherlands. This is not plausible in relation to the number of employees in the Netherlands.

-Operating income in Year t = 1170 mln. dollar. 234 employees: 5 mln. dollar per employee!


x mln. dollar PS T-1 PS T

Turnover 3900 7500 +192%

Cost and expenses 2750 4800 +176%

Gross profit 1150 2700 +230%

Expenses developm. and research

350 600

Selling expenses 450 850

Administrative expenses

80 80

Operating income 270 1170 +333%

Net property inc. rec. 0 -30

Income before taxes 270 1140

Employees 229 234


Measurability problems. Insufficient data (for example number of people employed, wages) (foreign) group companies. However, only 1% of total turnover is related to the sales of goods in the Netherlands.


Calculation operating income ‘Fiasco NL’:Gross profit = 2700-of which goods outside NL ( 99%) = 2670 (a) -of which goods in NL (1%) = 30 (b)Operating income attributed to the unit in NL: -5%*) of (a) is margin on transit = 133-40%*) of (b) is margin on sales in NL = 12-Total operating income NL = 145 *) with the help of a ‘standard margin’ on the sales of this kind of products


x mln. dollar PS T Adjustment Adjusted

Turnover 7500 7500

Cost and expenses 4800 4800

Gross profit 2700 2700

Expenses developm. and research

600 600

Selling expenses 850 1025 1875

Administrative expenses

80 80

Operating income 1170 -1025 145

Net property inc. rec. -30 1025 995

Income before taxes 1140 1140

Employees 234 234

Adjustments in source statistics necessarry? *

-Production Statistics: yes-Statistics of Finances of Enterprises (profit-and-loss-account): yes-International Trade Statistics in Goods: no-Balance of Payments: yes **

** Operating income ‘Fiasco NL’ is reduced by 1025. This amount is attributed to the foreign group companies. They will pay this amount to the Dutch enterprise as ‘quasi dividend’. Adjustment do not change income before taxes.

* remember: a key aim is consistency between description in the NA and sources!!!!

The Model T-Ford Company Ltd.

Producer of trucks (industrial activity)

Reorganisation in Year T. From this year is ‘T-Ford’ a production unit of a foreign parent company.

The production process in the Netherlands does not undergo any changes


Indication economic relevance

-Share of ‘T-Ford’ in national motor vehicle production: 20%

-Share of ‘T-Ford’ in the export of motor vehicles: 14%


Measurability problems. Which data are available?

-Production and intermediate consumption in PS: no-Number of produced motor vehicles: yesExport (motor vehicles): yes Year T: 1280* -Import (components): yes Year T: 1130* * mln euro


x mlns. euro.

Prod. Statistics

T-1

Prod. Statistics

T

Adjusted by NA

T

Production (o.w.export)-Export industrial services (= compensation by parent company)

1400

(1220)

155

1440

(1280)

Interm.consumption

(o.w. import)

1340

(1100)

95 1380

(1130)

Gross value added 60 60 60

o.w. wages 55 55 55

Operating income 5 5 5

Employees 1350


CONCLUSION

-No consistency between sources and NA

-No consistency between source statistics (for example PS and ITS)-Adjustments in sources (PS).

Remember: key aim is consistency in observation and description.

Logic International Ltd.

-In PS: A holding company of computer activities including a call centre for Europe located in NL and production plants abroad (assembling computers as industrial services). Invoicing of products and inputs (computer components) via NL holding, power of control production units delegated to local management.-NA: physical production process takes place abroad. Attribution of value added to NL is small-Indication economic relevance: registration ‘Logic’ in NA raises output and value added of the computer industry with 80% and 15% respectively


Year T

x mlns. Euro

PS (+SFE)

ITS Adjust-ments

Adjusted

Sales 3300 -3255 45Export 2950 500Import 400Cost and expenses

3200 -3190 10

Gross profit (value added)

100 -65 35

Wages 30 0 30Operating income

70 -65

5


CONCLUSION-No consistency between sources and NA-No consistency between source statistics (for example PS and ITS)-Adjustments in sources (PS). Remember: key aim is consistency in observation and description.-PS and NA: Registration of production, interm. cons. and value added of ‘Logic’ conform classification as other business activies (call centre etc.) and not as industrial activities.

Points of special interest

1. Detection of ‘difficult’ enterprises: which criteria can be used?

2. The methods used in determining adjustments.

3. It is easier to observe remarkable developments in the Netherlands than abroad. Profits can be attributed unjustly abroad!

4. The international consistency of the adjustments in NL statistics (asymmetries!).

Decision diagram

With the help of a decision diagram, the desirable solution in estimating consistent data of a multinational, of which the structure is changed, can be found.

Two examples of the decision diagram: ‘T-Ford’ and ‘Fiasco’.

Decision diagram The Model T-Ford Company Ltd.

Does the resident unit have a Dutch legal status?

Yes


Yes

Does the unit give anotherunit production orders?

No


No

Does the unit producegoods for other foreign units

of the enterprise?

Yes


Yes

Does the unit consider theproduction as industrial

services?

Yes


Yes

Does the unit have informationon market prices of raw

materials and final products?

No


No

Does the unit have information oninternal transfer prices of rawmaterials and final products?

No


No

Does the unit have informationon other prices or data volumes?

Yes


Yes

Attempt to estimate production and intermediate consumptionwith the help of this information

Decision tree Fiasco System International Ltd.

Does the resident unithave a Dutch legal status?

Yes

Decision diagram Fiasco System International Ltd.

Yes

Does the unit give anotherunit production orders?

No


No

Is the unit producinggoods for other foreign units

of the enterprise?

No


No

Does the unit have an establishment abroad without a separate

legal status?

No


No

Is the unit especially active intrading goods from and to other foreign units of the enterprise?

Yes


Yes

Is the magnitude of the operating income as a percentage of the trade

margin divergent to similar units?

Yes


Yes

Are all costs and sales valuedat market prices?

No


No

Attempt to implement adjustmentsas much as possible at market

prices

Documents

Multinational Enterprises Practical issues. The reason for -Measurability problems -Inconsistencies in source statistics -Need for guidelines