1. The impact of globalisation on defining the NACE code
22nd Meeting of the Wiesbaden Group on Business Registers, Tallinn, September 2010
Session 2: Concepts and Methods for Information and Data Sharing

2. Disposition Introduction The problem statement
Context
The phenomenon of International sourcing
”The jungle” of concepts
The problem statement
A fictitious example
Contradictory international recommendations and practices?
Conclusions
Tarja Hatakka 2

3. Introduction
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4. Context
Programme for the Modernisation of European Enterprise and Trade Statistics (MEETS)
One of the objectives: reviewing and further developing indicators related to globalisation
EuroGroups Register (EGR) as a basis for production of comparable statistics on globalisation of the economies
ESSnet to develop and implement a methodology for 'profiling’ of large and complex multinational enterprise groups
Nace Rev. 2
Rules for classification of units outsourcing
Tarja Hatakka

5. The phenomenon of International sourcing
Production of goods or services outside the compiling country by non-affiliated or affiliated enterprises.
Becoming more and more common
In Finland (+other Nordic countries and NL) the main business function sourced abroad has (in ) been the core business activity (e.g. manufacturing transformation activities)
Most often the model has been insourcing, i.e. the enterprise sources business functions within the same enterprise group
Source: joint publication by the national statistical offices of Denmark, Finland, the Netherlands, Norway and Sweden (2008), International Sourcing - Moving Business Functions Abroad.
Tarja Hatakka

6. ”The jungle” of concepts
Insourcing
production within the enterprise group
Outsourcing
production outside the enterprise group
Offshoring
outsourcing activities abroad
however, terms are not used unambiguously
Global manufacturing
can include several types of arrangements: re-exporting, goods under merchanting, goods under processing
Factoryless Goods Producers (FGPs)
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7. The problem statement
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8. Enterprise group is a manufacturing group
Enterprise group is a manufacturing group. What is the NACE code for enterprise A?
Enterprise A
Global decision centre
Own activity: head office activities, R&D, marketing, distribution
Finland
A sells all products further to end customers all over the world or to the distribution affiliate D in Netherlands
Affiliate B
Contractor
Own activity: manufacturing
Poland
Affiliate C
Contractor
Own activity: manufacturing
Germany
Affiliate D
Distribution
Own activity: trade
Netherlands
A owns raw materials used by B
C owns raw materials itself
Tarja Hatakka

9. Contradictory international recommendations and practices?
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10. International recommendations (1)
NACE Rev. 2 and ISIC Rev. 4
BR manual (European Commission, 2010)
The purpose of the principal activity code: ”…important in judging the role of certain units in the enterprise group structure, mainly the group head, the head office and special purpose entities (SPEs included in NACE Rev. 2 class 6430), but also in general in enterprise group structuring and demography. The enterprise group’s worldwide dispersion of employment by activity can also be studied by its constituent units.”
 Should we classify enterprise A under Services?
Units, which completely (or partly) outsource the transformation process, should be classified into manufacturing only if they own the raw material used as input to the production process
The rule is also valid if the contractor is a subsidiary unit (=insourcing)
 Should we classify enterprise A under Manufacturing?
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11. International recommendations (2) Recommendations for NAICS 2012
At the moment NAICS 2007 does not provide clear guidance on classification of units that control the entire process but outsource the transformation proces.
A study of the issue (published in May 2010)
Explicit guidance to classify factoryless goods producers (FGPs) in the manufacturing sector for NAICS 2012*
Why?
To classify FGPs based solely on ownership of materials was rejected as impractical (“Shifting among input sources based on relative costs is a common practice and should not generally result in a change of industrial classification.”).
Focus on the entrepreneurial aspects: Goods producers accept the entrepreneurial risk of producing and bringing goods to market.
*NB: There is no final decision on the implementation of this guidance.
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12. International practices
Finland queried the national practices from different EU countries concerning the turn-key projects (a special case of global manufacturing)
National practices were largely disparate concerning both the classification issue and the treatment of transactions
Global view vs. national view
Should we approach the definition from a global or national point of view when the activity is defined?
an issue discussed in the context of ESSnet on Profiling MNE’s
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13. Conclusions
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14. Conclusions
More guidelines are needed on the issues concerning international sourcing and especially insourcing (sourcing within the enterprise group)
Different solutions concerning the classification can have a great impact on the structure of the economy.
Different solutions create a risk for significant incomparability in data collection and compilation of statistics in and between different countries
Solutions need to be found in international co-operation.
For example “ESSnet on Profiling of MNEs” is a good forum to discuss such things
Tarja Hatakka