Multinational Enterprises: Practical Issues

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. 350 600
and research
Selling expenses 450 850
Administrative 80 80
expenses
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. 600 600
and research
Selling expenses 850 1025 1875
Administrative 80 80
expenses
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: yes
Export (motor vehicles): yes Year T: 1280*
-Import (components): yes Year T: 1130*
* mln euro
Prod. Prod. Adjusted
x mlns. euro. Statistics Statistics by NA
T-1 T T
Production 1400 1440
(o.w.export) (1220) (1280)
-Export industrial
services (= 155
compensation by
parent company)
Interm.consumption 1340 95 1380
(o.w. import) (1100) (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. PS ITS Adjust- Adjusted
Euro (+SFE) ments
Sales 3300 -3255 45
Export 2950 500
Import 400
Cost and 3200 -3190 10
expenses
Gross profit 100 -65 35
(value added)
Wages 30 0 30
Operating 70 5
income
-65
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
Does the resident unit

have a Dutch legal status?
Yes
Decision diagram
Yes
Does the unit give another

unit production orders?
No
Decision diagram
No
Does the unit produce

goods for other foreign units
of the enterprise?
Yes
Decision diagram
Yes
Does the unit consider the

production as industrial
services?
Yes
Decision diagram
Yes
Does the unit have information

on market prices of raw
materials and final products?
No
Decision diagram
No
Does the unit have information on

internal transfer prices of raw
materials and final products?
No
Decision diagram
No
Does the unit have information

on other prices or data volumes?
Yes
Decision diagram
Yes
Attempt to estimate production

and intermediate consumption
with the help of this information
Decision tree
Does the resident unit

have a Dutch legal status?
Yes
Decision diagram
Yes
Does the unit give another

unit production orders?
No
Decision diagram
No
Is the unit producing

goods for other foreign units
of the enterprise?
No
Decision diagram
No
Does the unit have an establishment

abroad without a separate
legal status?
No
Decision diagram
No
Is the unit especially active in

trading goods from and to other
foreign units of the enterprise?
Yes
Decision diagram
Yes
Is the magnitude of the operating

income as a percentage of the trade
margin divergent to similar units?
Yes
Decision diagram
Yes
Are all costs and sales valued

at market prices?
No
Decision diagram
No
Attempt to implement adjustments

as much as possible at market
prices

Multinational Enterprises: Practical Issues

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Multinational Enterprises: Practical Issues

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Multinational

-Inconsistencies in source statistics

-Need for guidelines

-Dramatic increase in flows of goods and

- Larger statistical problems limiting the

-Due to globalization the legal ownership of

-NA: the transaction identity supply = demand

1. SNA and ESA do not offer solutions for all

The territorial principle is the basic assumption

-GDP is the result of production activities of

-Central sales office established in the

-Assembly plants located abroad

-Conform Business Register part of wholesale

Relevant source statistics for NA:

What is the problem?

Measurability problems. Insufficient data (for

Calculation operating income ‘Fiasco NL’:

Producer of trucks (industrial activity)

Reorganisation in Year T. From this year is ‘T-

The production process in the Netherlands

Indication economic relevance

-Share of ‘T-Ford’ in national motor vehicle

-Share of ‘T-Ford’ in the export of motor

-Production and intermediate consumption in

-Import (components): yes Year T: 1130*

1. Detection of ‘difficult’ enterprises: which

With the help of a decision diagram, the

Two examples of the decision diagram: ‘T-

Does the resident unit

Does the unit give another

Does the unit produce

Does the unit consider the

Does the unit have information

Does the unit have information on

Does the unit have information

Attempt to estimate production

Does the resident unit

Does the unit give another

Is the unit producing

Does the unit have an establishment

Is the unit especially active in

Is the magnitude of the operating

Are all costs and sales valued

Attempt to implement adjustments

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