Module 6 FOREIGN AFFILIATES STATISTICS François RENARD MESDTAT STE Prague 4-6 December 2012

Structure of the course Module 1: Characteristics of the services sector, an overview Module2: Classifications Module3: Services transactions between residents and non-residents Module 4: SITS data collection Module 5: trade in services special cases Module 6: Foreign affiliates statistics

Introduction Foreign AffiliaTes Statistics (FATS) aim at describing the overall operations of foreign-controlled affiliates (affiliates in which a single investor owns more than 50% of the voting power). A major mode of supply for trade in services: need of a close and continuing contact between a supplier and a customer through commercial presence. But also mode of supply for trade in goods. Commercial presence (GATS mode 3) reflected by FATS, a set of variables measuring the activity of foreign affiliates.

Summary Introduction Usefulness of FATS What to collect Country and activity classification for FATS Best practices Conclusions

1. FATS usefulness

Foreign affiliates in 2007 80 000 parent companies and 800 000 affiliates - responsible for two-thirds of world trade. Foreign affiliates Employees: 82 million (1982: 22 million) Sales: $31 trillion (1982: $3 trillion) Exports: $6 trillion (1982: $1 trillion) Assets: $ 69 trillion (1982: $2 trillion) Source: UNCTAD World Investment Report 2008

Why measure FATS ? Analyse the role of MNEs and their affiliates in international production of goods and services: monitoring the performances of the foreign affiliates and their economic impact in the host economy (labor market, technology transfer, innovation and R&D, international trade, economic competition). As part of ITS, correspond to the GATS mode 3 (provision of services through commercial presence) FATS variables gain analytical interest when viewed in conjunction with comparable information on total home or host economy.

What do FATS measure ? The overall economic activity of affiliates Activity of foreign controlled affiliates in the reporting economy (inward FATS). Activity of foreign controlled affiliates of the reporting economy (outward FATS). FATS is at the crossroad of business statistics, balance of payments and IIP BOP and IIP: flows and stocks of FDI to identify the foreign-owned subset of companies. Business statistics: for the identification of the relevant economic variables.

Principles underpinning FATS The MSITS provided the first internationally accepted guidelines for FATS data compilation The Manual’s recommendations are in line with international standards: SNA : comparability with statistics on the domestic economy. BPM (balance of payments): cross-border trade in services. OECD Benchmark Definition of FDI. OECD handbook on Globalization.

2. What to collect ?

Foreign Direct Investment Enterprises covered in FATS are a subset of FDI enterprises built on the majority owned or controlled affiliates FDI relationship establishes a lasting interest by a resident enterprise from one economy (the direct investor) in an enterprise which is resident in another economy (the direct investment enterprise) FDI relationship: More than 50% of the equity capital or voting power: control Between 10% and 50%: influence Less than 10%: no influence 10% for defining FDI, majority ownership for FATS

The FDI relationship A controls B B controls C A controls C Country A Country B Country C A controls B B controls C A controls C A influences B B controls C A influences C A controls B B influences C A influences C A influences B B influences C No influence of A On C 12

Direct Investment Enterprises Associate: An incorporated enterprise, in which the direct investor owns between 10 and 50 per cent of the voting power Subsidiary: An incorporated enterprise, in which a direct investor owns more than 50% of the voting shares and “has the right to appoint or remove a majority of the members of the administrative, management or supervisory board”. Branch: An unincorporated enterprise in the host country that is a permanent establishment or office of a foreign direct investor or is an unincorporated partnership or joint venture between a foreign direct investor and third parties. Land, structures and Mobile equipment: treated as a branch. An investment in a notional enterprise in the host country.

Enterprises covered in FATS A subset of the FDI population: majority owned (controlled) foreign affiliates A single foreign investor (or associate investor group) owns more than 50% of their ordinary share or voting power: as such it can take part to the activity of the affiliate and to the definition of its strategy. In line with the SNA concept of foreign-controlled enterprises. Includes subsidiaries and branches but excludes associates. FATS covers affiliates producing both goods and services A special focus on those affiliates producing services.

FDI and FATS enterprises

Inward and outward FATS Inward FATS: a measure of the activity of foreign controlled affiliates in the reporting economy. Outward FATS: a measure of the activity of foreign controlled affiliates of MNEs of the reporting economy. Priority given to inward FATS: easier to compile and more meaningful for the GATS.

Inward and outward FATS

Priority variables for FATS Sales or output: directly comparable with cross-border trade in services and as such the most important information on FATS to be collected. Employment: assess the impact of affiliates on labour market. Value added: output originated from the affiliate itself (total output less intermediate output). Exports and imports of goods and services: to be computed separately, and between related and unrelated parties. Number of enterprises: to be compared with the total of firms in the compiling economy. Also country and Industry breakdown

Additional variables Total of financial and non-financial assets Net worth: assets-liabilities Compensation of employees Research and development Gross capital formation

3. Country and activity classification for FATS

Country classification of FATS The questions are: in what country does the production of the affiliates take place? and what country is the owner of the producing affiliate? There are two possibilities for FATS: Immediate host / home country. Ultimate beneficial owner (UBO) - known in FDI as the Ultimate Controlling Institutional Unit (UCI). MSITS recommends UBO for FATS in contrast to FDI statistics which use the Immediate country of investment. UBO is more meaningful: UBO derives the benefits from controlling the direct investment affiliate Country of the immediate owner may be used when UBO is not known and to align on FDI concepts

Definition: foreign control and UBO Foreign control: The controlling institutional unit is resident in a different country from the one where the institutional unit over which it has control is resident. Definition of the UBO: It is «an enterprise proceeding up a foreign affiliate’s chain of control, beginning with and including the foreign parent, that is not owned more than 50% by another enterprise person » (BD 4). The decision about the UBO should be taken proceeding the ownership chain of the units step by step, in each step determining control.

Looking for UBO C is directly controlled (60%) by D (country 4) A (country 1) is directly controlled (70%) by C (country 2) C is directly controlled (60%) by D (country 4) D directly controlled by F which is not controlled by another company C is the A’s mother company and F (country 6) is its UBO 23

Geographical Attribution Inward FATS Foreign investor COMPILING COUNTRY Majority ownership Operations of foreign-owned affiliate Immediate owner Majority ownership Foreign investor Supplementary information Described Statistics on inward FATS UBO Operations allocated to the country of 24

Example of inward FATS Three new enterprises in the compiling economy (France): A: 100% owned by USA parent company, with no other foreign ownership. B: 30% owned by a Dutch parent company C: 51% owned by a Luxembourg holding company. Owner of holding company is from USA. Classified as follows A: FATS and FDI: UBO and UCI = USA; B: FDI only: UCI = Netherlands C: FATS and FDI: UBO = USA, UCI (immediate ownership)= Luxembourg

Geographical Attribution Outward FATS COMPILING COUNTRY Foreign affiliate (holding company) Majority ownership Resident investor Majority ownership Operations of foreign affiliate Described Statistics on outward FATS Operations allocated to the country of 26

Example of Outward FATS Three new enterprises A: USA: 100% owned by a French parent company. B: Netherlands: 30% owned by French company. C: Cayman Islands: 51% owned by a French parent company investing in a holding company, used to set up an operating company in the USA. Classified as follows A: FATS and FDI: UBO and UCI = USA; B: FDI only: UCI = Netherlands C: FATS and FDI: UBO = USA, UCI = Cayman Islands

Industry and product classification FATS variables need to be classified on an activity basis Foreign affiliates are classified by their primary activity, according to ISIC categories for foreign affiliates (ICFA) ICFA can be linked to EBOPS In the long term FATS variables such as sales, imports or exports should also be broken down by product More appropriate to be compared with data on services delivered through cross-border trade (EBOPS) and needed for GATS

The 100 per cent rule FATS variables for a given affiliate need to be attributed in their entirety to a single country of owner. No adjustment should be made for the percentage of foreign ownership. Example: a domestic enterprise in which foreigners own 65% of the voting shares export US$ 100 million. All of the exports should be treated as the exports of this foreign- owned enterprise and not the foreigner owners’ share of US$ 65 million.

4. Data collection best practices

Two basic approaches of FATS data collection Two basic approaches Use of surveys Survey to resident affiliates of MNEs for inward, survey to resident parent companies for outward FDI stock survey with an extra sheet for FATS or separate survey with foreign controlled subset of the FDI population Use of existing data Identification of the foreign controlled subset of FDI enterprises Cross with Structural Business Statistics (SBS) Mixed approach FDI statistics as a temporary alternative Inward FDI stocks with a breakdown by activity and investor country Limitation: insight on penetration but not on activity

Designation of enterprises which are foreign-controlled It is a subset of direct invested enterprises which can be tackled using the chain of ownership. Several data sources can be used: Statistical registers: GBR, FDI register, enterprises group register Surveys: business surveys, FDI surveys, statistics on business demography Administrative sources: VAT register… Systematic analysis of press reports Ownership criterion needs to be included in one or more of these data sources: can take the form of an extra question on UBO

Inward FATS Affiliates can be surveyed directly on their activity The most important data to collect, as GATS makes commitments with respect to the supply of services in the compiling own economy, rather than services supplied abroad. Data easier to collect as generally already included in existing statistics on resident enterprises. Target population to be surveyed All foreign-controlled enteprises and all branches, whether they themselves control affiliates abroad or not.

Inward FATS data collection As affiliates relate to resident enterprises, data describing their activity directly available from structural business statistics surveys (SBS) and still collected for national accounts needs and the GDP calculation: linking the FDI survey data with SBS data through common identifiers. As a consequence priority variables (such as sales, employment, value added, exports and imports, number of enterprises) with a breakdown by activity are easily available. Ensures the consistency with local enterprises data. The only additional data needed is the country allocation of control.

Outward FATS data collection As affiliates whose activity has to be recorded relate to non- resident enterprises are located outside the compiling economy, data cannot be collected directly. Resident parent companies therefore need to be surveyed on their activity abroad. Use of existing FDI survey Identification of all stakes above 50% One extra sheet for FATS variables Efficiency gains for the compiler and the reporting population (one survey) New surveys as an alternative Targeted on those enterprises with foreign-controlled affiliates

What about data sources in practice

Best practices Inward Outward 10 countries use SBS for those affiliates with a majority- ownership affiliates tackled using FDI register, GBR or other. A link is created with SBS 9 countries use FDI stock survey with a special spread sheet for FATS variables 3 countries use a separate ad hoc survey Outward 14 countries only compile outward FATS 11 countries use the FDI survey

Two examples of best practices Austria Need to fulfil EU requirements: yearly production of 10 inward FATS variables with an activity and a geographical breakdown. OENB provides a list of foreign-controlled affiliates including the residence of the UBO. Statistics Austria creates a link with SBS database and provides FATS variables. United-States FATS are compiled by the US Department of Commerce A survey-based system Benchmark survey every five years with maximum coverage and great number of variables, annual survey with fewer data.

What about the variables ?

5. Conclusions

Importance of FATS Growing importance of MNEs in the world economy. Need to evaluate the economic impact of these MNEs. FATS are particularly important for analysing trade in services, as lot of them need a close contact between the consumer and the producer (priority in the MSITS). Despite extra costs to statistical agencies and respondents, the globalisation of the world economies has motivated a number of countries to develop such data. FATS compilation should focus first on inward side and priority variables. SBS may be the easier approach for data collection in most circumstances.

Recommendations FATS should cover controlled affiliates, defined in the FDIR. FATS variables should be compiled for all foreign affiliates: those in goods and services. Geographical attribution of inward FATS variables should be the country of the UBO; the country of the first foreign parent should be provided to facilitate linkages with FDI. Geographical attribution of outward FATS should be the country of location of the affiliates whose activity described. FATS to be compiled first on an activity basis and on a product basis as a long term goal Priority variables: sales (or turnover) , employment, value added, X and M of goods and services, number enterprises.