1. Multinational Enterprises Practical issues

2. The reason for -Measurability problems -Inconsistencies in source statistics -Need for guidelines

3. Catch words -Measurability -Consistency -Tailor-made solutions -Territorial principle (SNA/ESA)

4. 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

5. 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

6. 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!)

7. 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

8. 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.

9. 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

10. Classification examples -Substantial expenses recharged, transfer prices (Fiasco) -Production versus industrial services (Chempion, T-Ford) -Deconsolidation, demarcation of a foreign affiliate (Logic)

11. 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.

12. Fiasco System International Ltd. 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)

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

14. Fiasco System International Ltd. 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!

15. Fiasco System International Ltd. x mln. dollarPS T-1PS T Turnover39007500+192% Cost and expenses27504800+176% Gross profit11502700+230% Expenses developm. and research 350600 Selling expenses450850 Administrative expenses 80 Operating income2701170+333% Net property inc. rec.0-30 Income before taxes2701140 Employees229234

16. Fiasco System International Ltd. 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.

17. Fiasco System International Ltd. 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

18. Fiasco System International Ltd. x mln. dollarPS TAdjustmentAdjusted Turnover7500 Cost and expenses4800 Gross profit2700 Expenses developm. and research 600 Selling expenses85010251875 Administrative expenses 80 Operating income1170-1025145 Net property inc. rec.-301025995 Income before taxes1140 Employees234

19. 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!!!!

20. 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

21. The Model T-Ford Company Ltd. Indication economic relevance -Share of ‘T-Ford’ in national motor vehicle production: 20% -Share of ‘T-Ford’ in the export of motor vehicles: 14%

22. The Model T-Ford Company Ltd. Measurability problems. Which data are available? -Production and intermediate consumption in PS: no -Number of produced motor vehicles: yes Export (motor vehicles): yes Year T: 1280* -Import (components): yes Year T: 1130* * mln euro

23. The Model T-Ford Company Ltd. 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) 951380 (1130) Gross value added60 o.w. wages55 Operating income5 55 Employees1350

24. The Model T-Ford Company Ltd. 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.

25. 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

26. Logic International Ltd. Year T x mlns. Euro PS (+SFE) ITSAdjust- ments Adjusted Sales 3300-325545 Export 2950500 Import 400 Cost and expenses 3200-319010 Gross profit (value added) 100-6535 Wages 300 Operating income 70 -65 5

27. Logic International Ltd. 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.

28. 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!).

29. 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’.

30. Decision diagram The Model T-Ford Company Ltd. Does the resident unit have a Dutch legal status? Yes

31. Decision diagram The Model T-Ford Company Ltd. Yes Does the unit give another unit production orders? No

32. Decision diagram The Model T-Ford Company Ltd. No Does the unit produce goods for other foreign units of the enterprise? Yes

33. Decision diagram The Model T-Ford Company Ltd. Yes Does the unit consider the production as industrial services? Yes

34. Decision diagram The Model T-Ford Company Ltd. Yes Does the unit have information on market prices of raw materials and final products? No

35. Decision diagram The Model T-Ford Company Ltd. No Does the unit have information on internal transfer prices of raw materials and final products? No

36. Decision diagram The Model T-Ford Company Ltd. No Does the unit have information on other prices or data volumes? Yes

37. Decision diagram The Model T-Ford Company Ltd. Yes Attempt to estimate production and intermediate consumption with the help of this information

38. Decision tree Fiasco System International Ltd. Does the resident unit have a Dutch legal status? Yes

39. Decision diagram Fiasco System International Ltd. Yes Does the unit give another unit production orders? No

40. Decision diagram Fiasco System International Ltd. No Is the unit producing goods for other foreign units of the enterprise? No

41. Decision diagram Fiasco System International Ltd. No Does the unit have an establishment abroad without a separate legal status? No

42. Decision diagram Fiasco System International Ltd. No Is the unit especially active in trading goods from and to other foreign units of the enterprise? Yes

43. Decision diagram Fiasco System International Ltd. Yes Is the magnitude of the operating income as a percentage of the trade margin divergent to similar units? Yes

44. Decision diagram Fiasco System International Ltd. Yes Are all costs and sales valued at market prices? No

45. Decision diagram Fiasco System International Ltd. No Attempt to implement adjustments as much as possible at market prices