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Multinational Enterprises

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.

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Multinational Enterprises

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  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 • Demarcation of a foreign affiliate • Cost calculations within the enterprise (transfer pricing in principle at market prices) • Production versus industrial services • Legal ownership via Netherlands, commodity flows around Netherlands or vice versa

  8. Summary and conclusions • SNA and ESA do not offer solutions for all problems. Frequently tailor-made-solutions. Measurability problems. • Demand of consistency of statistics in observation and description (including adjustments). • 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.

  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.

  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.

  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.

  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 • Detection of ‘difficult’ enterprises: which criteria can be used? • The methods used in determining adjustments. • It is easier to observe remarkable developments in the Netherlands than abroad. Profits can be attributed unjustly abroad! • 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 diagramThe Model T-Ford Company Ltd.

  31. Decision diagramThe Model T-Ford Company Ltd.

  32. Decision diagram The Model T-Ford Company Ltd.

  33. Decision diagram The Model T-Ford Company Ltd.

  34. Decision diagram The Model T-Ford Company Ltd.

  35. Decision diagram The Model T-Ford Company Ltd.

  36. Decision diagram The Model T-Ford Company Ltd.

  37. Decision diagramThe Model T-Ford Company Ltd.

  38. Decision tree Fiasco System International Ltd.

  39. Decision diagram Fiasco System International Ltd.

  40. Decision diagram Fiasco System International Ltd.

  41. Decision diagram Fiasco System International Ltd.

  42. Decision diagram Fiasco System International Ltd.

  43. Decision diagram Fiasco System International Ltd.

  44. Decision diagram Fiasco System International Ltd.

  45. Decision diagram Fiasco System International Ltd.

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