The impact of globalisation on the EU-system of statistical units Wiesbaden Group, session 2 Tallinn, 27 September 2010 Jean Ritzen Statistics Netherlands

Outline Introduction The problem Purposes of the SU study GBR as starting point Direction of solution Some conclusions Wiesbaden Group: MNE & Globalisation

Preambulary principle Preambulary principle questions on what do we want to measure regarding MNEs: - Data on real economic processes of the groups? - Data on the national administrative organisations of the groups? (Which taxes in what stage: taxes are component of profit/loss  allocation variable) Wiesbaden Group: MNE & Globalisation

The problem The sum of the parts of a MNE differs from the total Reasons: - Each statistical agency collects information using own method, even if the used methods theoretically are harmonised. - Bottom up approaches do not lead to right totals - Inconsistencies in data collection and/or data processing - Insufficient recognition of the real context  ESSnet on profiling large and complex MNEs Wiesbaden Group: MNE & Globalisation

Purposes of SU-study (WP-B) Purposes of the methodological study on statistical units - to provide the feasibility study with the methodological underpinning of the statistical units structure of enterprise groups to be used in business statistics and as object of 'profiling'. - to provide input for the development of the data model and the development of algorithms for delineation of statistical units within enterprise groups in the EGR and national statistical registers. . to provide input for the process of adapting Council Regulation (EEC) No 696/93 of 15 March 1993 on the statistical units for the observation and analysis of the production system in the Community These purposes lead to the provision of an actualised system of well defined statistical units that meets and reflects the needs for adequate profiling of large and complex Multinational Enterprise Groups and thus meet the objectives of the ESSnet. Wiesbaden Group: MNE & Globalisation

Goal: Seeing the whole elephant Globalisation is an irreversible reality. Parts of the “elephant” must fit in the whole picture How to break down the puzzle and built up it again? Richard Barnabé, 2001; Roundtable MNE-project  report to UN-ECE in 2005 Wiesbaden Group: MNE & Globalisation

Statistical units Statistical units are the units to which the statistical figures relate. Coherent system of statistical units developed, national and international (UN-ISIC, EU-SU-regulation 1993) EU-statistical units are defined in the Statistical units regulation (early nineties). Introduction of the aspect of autonomy for actors in the economy as the leading criterion (above homogeneity) UN statistical units  report of October 2007 Autonomy as criterion is important because of the need of availability of meaningfull relevant real economic information in bookkeeping or reports of units. Wiesbaden Group: MNE & Globalisation

EU-statistical units (1993 regulation) The main present statistical units are: The Enterprise Group (EG) The Enterprise (ENT) The local unit (LU) Related to these units, other statistical units are defined, but these are more to be used for analytical purposes and are less appropriate for observation or publication purposes. These units are: The Kind of Activity Unit (KAU), as a part of an enterprise The Local Kind of Activity Unit (LKAU), as a part of a local unit; The Unit of Homogeneous Production (as a part of an Enterprise or of a KAU); The Local Unit of Homogeneous Production (as a part of a local unit or of a LKAU). The Institutional unit (IU) Wiesbaden Group: MNE & Globalisation

EU Statistical units: relationships Statistical World Administrative World EG Enterprise Legal Unit IU KAU Local Unit UHP Local KAU Local UHP Source: Peter Struijs Wiesbaden Group: MNE & Globalisation

Statistical units in the BR In the BR actors in the real economic world must be registered, according EU-BR-regulation. These are: Enterprise group: unit contolling financing processes (Institutional sector code) Enterprise: unit controlling the production processes (SIC-code) Local unit (regional aspects of production processes, SIC-code) Operationalisation: translation of administrative or organisational units into statistical units, e.g. by profiling (national approach) Wiesbaden Group: MNE & Globalisation

The relationships EG, ENT and LU, 1993 (Domestic) Legal Entity (LeU) (Legal or natural person) Economic/statistical world Legal/administrative world (Domestic) Enterprise group Local (legal) entity Enterprise Local unit Wiesbaden Group: MNE & Globalisation

The SBR model (national) Legal/administrative world Economic/statistical world (Domestic) Enterprise group (Domestic) Legal Entity (LeU) (Legal or natural person) SPE (IU) Enterprise Local unit Local (legal) person Wiesbaden Group: MNE & Globalisation

Fundamental changes in interpretations of unit definitions - Definition or interpretation of the EG: Not longer combination of enterprises, but combination of legal entities which are under common control - Definition or interpretation of enterprise: Enterprise is result of top down analysis of EG. Enterprise as smallest combination of legal units can lead to problems, e.g. with ancillary activities Issue: Identification of the enterprise unit Wiesbaden Group: MNE & Globalisation

Introduction of the profiling method for large units Definition of profiling: Profiling is a method to analyse the legal, operational and accounting structure of an enterprise group at national and world level, in order to establish the statistical units within that group, their links, and the most efficient structures for the collection of statistical data. Wiesbaden Group: MNE & Globalisation

Reasons for international incomparabilities - the data collection method, including sampling (primary data collection/use of data in administrative registrations) - the nationally applied definitions of variables - differences of classification or in the use of classifications - errors in reporting data - use of different types of units (e.g. enterprise or local KAU) - deviating (definitions of) statistical units (e.g. different criteria like that of autonomy) - deviating methods used in the consolidation of data - decentralised (national) data compilation at MNEs Wiesbaden Group: MNE & Globalisation

An improved model (global EG --> truncated EG) Economic/statistical World (global) Global Enterprise group Legal unit Legal/administrative Local (legal) unit World (sub-global) “National” part of Enterprise group (“truncated EG”) “National” enterprise Local unit Legal or operational unit (sub global) (legal or Operational) Wiesbaden Group: MNE & Globalisation

An improved model (global EG --> truncated EG) Economic/statistical World (global) Global Enterprise group Legal unit Legal/administrative Local (legal) unit EGR World (sub-global) “National” part of Enterprise group (“truncated EG”) “National” enterprise Local unit Legal or operational unit (sub global) (legal or Operational) Wiesbaden Group: MNE & Globalisation

An improved model (global EG --> truncated EG + SPEs) Legal/administrative World (global) Economic/statistical World (global) Economic/statistical World (sub-global) Legal/administrative World (sub-global) Legal or operational unit (sub global) “National” part of Enterprise group (“truncated EG”) Legal entity Global Enterprise group “National” enterprise SPE Local unit (legal or Operational) Local (legal) entity Local unit Wiesbaden Group: MNE & Globalisation

An improved model (global EG --> truncated EG), cont Sub-global (=truncated) can be national, but also e.g. European Advantage: Co-ordination at EG-level: international tuning Full coverage of MNE - National responsibilities remain Disadvantage: Does not solve consistency problem Consequence: introduction additional unit, “truncated EG” Wiesbaden Group: MNE & Globalisation

A generalised SBR model (global) Legal/administrative world Economic/statistical world Legal Entity (LeU) (Legal or natural person) Global Enterprise group E G R Global Enterprise Local (legal) entity Local unit Wiesbaden Group: MNE & Globalisation

A generalised SBR model (global) Legal/administrative world Economic/statistical world Legal Entity (LeU) (Legal or natural person) Global Enterprise group E G R SPE Global Enterprise Local (legal) entity Local unit Wiesbaden Group: MNE & Globalisation

A generalised SBR (EGR) model (global --> truncated) Legal/administrative World (global) Economic/statistical World (global) Economic/statistical World (sub-global) Legal/administrative World (sub-global) EGR Legal or operational entity (sub global) Legal entity Global Enterprise group Truncated Enterprise group SPE SPE Global Enterprise Truncated Enterprise Local unit legal or operational Local (legal) entity Local unit Local unit Wiesbaden Group: MNE & Globalisation

A generalised SBR (EGR) model (global --> truncated) Legal/administrative World (global) Economic/statistical World (global) Economic/statistical World (sub-global) Legal/administrative World (sub-global) EGR Legal or operational entity (sub global) Legal entity Global Enterprise group Truncated Enterprise group SPE SPE Global Enterprise Truncated Enterprise Local unit legal or operational Local (legal) entity Local unit Local unit Wiesbaden Group: MNE & Globalisation

Proposed definitions (1) Enterprise Group Present definition: An enterprise group is an association of enterprises bound together by legal and/or financial links. A group of enterprises can have more than one decision-making centre, especially for policy on production, sales and profits. It may centralize certain aspects of financial management and taxation. It constitutes an economic entity which is empowered to make choices, particularly concerning the units which it comprises. Proposed new definition: The enterprise group is a set of legal units under common direct or indirect control. It mostly appears as a combination of legal units bound together by legal and/or financial links. Wiesbaden Group: MNE & Globalisation

Proposed definitions (2) Enterprise Present definition: The enterprise is the smallest combination of legal units that is an organizational unit producing goods or services, which benefits from a certain degree of autonomy in decision-making, especially for the allocation of its current resources. An enterprise carries out one or more activities at one or more locations. An enterprise may be a sole legal unit. Proposed new definition: The enterprise is a single legal unit (including a natural person), an enterprise group as a set of legal units under common control, or a part of an enterprise group, producing goods or services. It benefits from a certain degree of autonomy in decision-making, especially for the allocation of its current resources. The enterprise will mostly appear as an organisational unit that can provide meaningful data for statistics. Wiesbaden Group: MNE & Globalisation

Proposed definitions (3) The global enterprise may be part of an all-resident enterprise group or be a single legal unit, if it is not part of a set of legal units under common control. The truncated enterprise is the part of the global enterprise that belongs to the “truncated enterprise group” of the “multinational enterprise group” (MNE). Within an all-resident enterprise group, the global enterprise and the truncated enterprise are one and the same unit. SPEs are to be dealt with as “quasi enterprises”. These mostly are national. Wiesbaden Group: MNE & Globalisation

Requirements - Autonomy (still possible at sub-levels?) - Identifiability - Recognition (administrative, operational and statistical) - Accepted and acceptable (both MNE and statistics) - Data availability - Observable - Meaningful data at all levels (global and sub global) and for the specified uses Related to the available business information systems Wiesbaden Group: MNE & Globalisation

Classifications - SIC (Standard Industrial Classification),  NACE industries - Institutional classification (IC) - Classification of changes SIC and IC lead to homogeneous groups (by industry or institutional) Institutional classification applies to the Enterprise Group unit; SIC relates to units related to production processes (Ent, KAU, Local Unit) Firstly the unit should be established, that has to be classified thereafter! Depending on purpose  dual or multiple classifications Wiesbaden Group: MNE & Globalisation

SU – special issues The subsidiarity principle The response burden The relationship with other unit systems (ISIC) Wiesbaden Group: MNE & Globalisation

How will be affected subsidiarity? From strict decentralised (national) to centralised: 1. Strict subsidiarity: pure bottom up: existing practise 2. National authorities are responsible but based on harmonised rules and definitions 3. National authorities follow centralised group profile and are responsible for data collection accordingly nationally From strict decentralised (national) to centralised 4. Centralisation: Agency of country responsible for profile of the group collects data of the whole group and disseminates data to agencies of countries in which the group carries out activities Wiesbaden Group: MNE & Globalisation

Conclusions - Globalisation leads to the need of adaptation of systems (frames and processes) - More and more mutual interdependencies - Globalisation goes beyond European boundaries  need for tuning different statistical systems (e.g. EU and UN) - Profiling MNEs requires international communication and co-operation - Implementation using prototyping approach and gradually - Revision SU-regulation to be considered Wiesbaden Group: MNE & Globalisation

Thank you for your attention! Questions?/Discussion jhg.ritzen@cbs.nl Wiesbaden Group: MNE & Globalisation