third international conference on establishment surveys introductory overview lecture

ICES-III CONFERENCE Montreal, 19th June 2007

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Third International Conference on

Establishment Surveys

Introductory Overview Lecture

Definitions and Units

Andreas Lindner

OECD Statistics Directorate


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Content of the lecture

• Importance of statistical units

• National data collection systems and their integration into the international dimension

• Different definitions of statistical units

• OECD survey on SME business frames

• Compilation strategies and links to administrative sources

• The impact of globalisation

• Linking systems together

• Multinational enterprises (MNEs) and Enterprise Groups (EGs)- a new statistical unit

• Outlook


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Are statistical units important?• The definition of units is the backbone of registers

• They largely determine whether or not economic and social reality is correctly reflected in statistics

• Together with the business register design they allow (or prohibit) to correctly measure production, the flow of goods, services and capital, employment, financial data, ownership, control etc.

• A coherent system of interrelated standardised statistical units is key for effectively combining data from different surveys and, hence, capturing the full array of economic activities

• Coherence with and integration of the international dimension is required since it reflects the way businesses operate

• Statistical units are very important!


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Units constitute systems

•Administrative & legal system

•Economic system

•Statistical system

•Global, international system

•…Are these systems in tune with each other ?


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National systems…

• Great variety of units and definitions exist, because they have to “fit” the national set of conditions

• The statistical unit(s) are the translation of the legal and administrative set of conditions into an as much as possible standardized statistical representation of the society

• Ideally, they should allow consistent linking across data collections, representing a data warehouse and not isolated stovepipes

• Countries largely differ in their ability to do so


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…should allow to “bridge” to the international dimension

• Any economy is today more than ever integrated in an international world economy with complex interrelations

• For statistical analysis, this requires to have standardized concepts and definitions across countries, allowing to compare the comparable

• This represents a permanent challenge to statisticians and International Organisations are called upon to facilitate this process by issuing international recommendations and measurement standards


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An OECD survey on SBS/SME statistics identified the following

statistical key policy recommendations:

• Promote international convergence of statistical concepts and processes

• Foster greater international comparability of statistics

• Promote development of an integrated business statistical register

• Promote data linking to make better use of existing data and reduce respondent burden on SMEs

• Carry out policy-relevant empirical analyses to underpin evidence-based policy making


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A mix of definitions of SME’s

• Legal = statistical definition(5 countries)

• Most EU countries differentiate legal from statistical purposes (see box 1)

• Statistical definition generally based on number of employees or mix (e.g. persons and turnover etc.)

• Different thresholds and sector-specific particularities


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Legal/administrative vs. statistical definition of SMEs in the EU

Box 1: The definition of SMEs according to the European Commission recommendation 2003/361/EC

- For legal and administrative purposes:

Enterprises Employees Annual Turnover Annual Balance

sheet Autonomous

Micro enterprise 1 to 9 < 2 million euro < 2 million euro

Small enterprise 10 to 49 < 10 million euro < 10 million euro

Medium enterprise 50 to 249 < 50 million euro < 43 million euro

25% or more of the capital or voting rights of another enterprise

Large enterprise More than 250 > 50 million euro > 43 million euro

- For statistical purposes:

The main criteria of SME statistics for statistical purposes are the number of persons employed.


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Rich variety of statistical units

• General impression: the same name does not necessarily mean the same thing in another country. True? Evidence suggests that this is the case.

• Is the enterprise vs. establishment split meaningful? Why not calling it “economic statistical unit”?

• Despite Council Regulations, the situation in the EU seems less harmonized than one might assume


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Council Regulation 696/93: 8 different statistical units (legal, geographical, activity criteria)

• the Enterprise;

• the Institutional Unit;

• the Enterprise Group;

• the Kind-of-activity Unit (KAU);

• the Unit of Homogeneous Production (UHP);

• the Local Unit;

• the Local Kind-of-Activity Unit (local KAU);

• the Local Unit of Homogeneous Production (local UHP).


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UN classification ISIC

• the enterprise;

•enterprise group;

•kind-of-activity unit (KAU);

• local unit;

•establishment;

•homogeneous unit of production.


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The Canadian statistical structure:

• Enterprise: the highest level of the hierarchy with complete financial statements and information about international links. An enterprise may have one or more companies

• Company: A somewhat homogeneous production structure with balance sheets data. May have one or more establishments.

• Establishment: The most homogeneous production level with economic key data(output, inputs, wages…). May have one or more location.

• Location: A unique physical production unit.


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A wealth of statistical units

• The EU focus on “enterprise” can be considered as a compromise taken in 1993 to accommodate very different national practices

• The system of international standardisation is incoherent with respect to statistical units

• EU terms need to be translated into world-wide methodology

• The legal dimension needs to be distinguished from the economic dimension

• The economic dimension is likely to become more important


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OECD survey: business frames used for SME statistics

•Half of countries reported use of combination of different sources, sometimes according to sectors and/or size classes

•Agriculture often the exception to the rule (agr. = from statistical source)

•Very different thresholds across countries


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Effects of different thresholds on coverage: four EU countries in comparison to the Italian

BR = 100 Graph 3 - Effects of different inclusion thresholds on the coverage ratio of the Italian BR=100 - 2001

Threshold values in braketsSource: ISTAT

0,010,020,030,040,050,060,070,080,090,0

100,0

Denmark (2,683 euro)

Finland (8,409 euro)

Portugal (9,976 euro)

United Kingdom (83,000 euro)

Serie1


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Identified limitations of Business Frames for SBS:

• Different updating intervals limit comprehensive coverage

• A specific SME frame is the exception

• Confidentiality issues limit availability of data for other users/producers

• General concern about quality and coverage of demographic data, in particular for deaths

• Difficulties were reported as to the proper allocation of activities to industries

• The quality of the Business Frame was generally considered as appropriate, although improvements are foreseen in many countries with respect to SMEs, change of activity, legal status etc.


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The traceability issue

• Ability to trace change through a unique identifier code for the local unit/establishment would allow to better capture unit activity and de-registration

• Similarly, the introduction of links between legal units in enterprise groups and groups of companies would enhance identification of changes in size, ownership and location for units involved in events such as mergers and splits


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Collection and compilation strategies

• Germany and the US are the only countries in the sample under review where the NSO is not in charge of official statistics on SMEs.

• Almost all countries have different treatment for core and specific statistics

• Some countries have developed tools to monitor the response burden. The strategy developed is therefore to collect core variables through the integration of census/surveys based data and administrative data


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Collection and compilation strategies (2)

• In the majority of countries the NSO is fully in charge of data collection

• In the remaining countries, the NSO plays an important coordinating role (Germany is the exception where the NSO has “outsourced” SME data collection)

• In the majority of countries, SME core statistics are differentiated from specific SME variables. The typical pattern is a reduced sample for core data as opposed to – often voluntary – thematic surveys


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Data linkage with administrative sources

• Very different access patterns for NSOs to individual records could be identified, ranging from full to no access.

• Where access to administrative and other sources is partial, differences in the definition of variables have been commonly seen as a major impediment to the use of administrative sources, different observation units, classification and the absence of a unique identification number have also been mentioned.

• Sometimes technical problems hinder access to administrative sources. Countries generally have identified the main sources they would like to access


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Access and linkage with administrative sources

• The picture regarding access of NSOs to administrative SME data is mixed. Country practice differs ranging from full access via partial access to no access:

• Although about 2/3 of responding countries state that NSOs have full access, half of them reported problems in uses or little practical experiences

• Five countries reported only partial access

• Japan and Switzerland reported that no access was granted to NSOs


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Access and linkage with administrative sources (2)

• In the case of access, but no usage, the main reason were different basic units and absence of links between registers and administrative data

• Similarly, the main impediments to a better use of available data in the two distinct sources were:

• Different definitions of variables

• No common identifier

• Different classifications and thresholds


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The impact of globalisation on statistical units/definitions

• One of the most visible manifestations of a more globalised world is trade. The remarkable growth of trade flows is undisputable, in particular for emerging major players (see next slide)

• But, as can be seen from the remarks later under “Linking systems together…”, even trade and business statistics are rather separate entities needing reconciliation/standardisation…


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Relative growth of exports of goodsGrowth over the period 1996-2005,

OECD total = 1


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The impact of globalisation on statistical units/definitions (cont’d)

•The real problem is that statistical systems have been “overtaken” by the speed of globalisation obliging national reporting systems and structures to align to this paradigm shift

• In other words, “national” concepts need to incorporate the international dimension to adequately reflect the reality of today’s production process


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Statistical units/definitions more or less in tune

Administrative & legal system

Statistical System Economic System


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…went out of tune

Administrative & legal system

Statistical System Economic System


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As a consequence, both Administrative & legal and

Statistical System…

• Need to adapt to (=better integrate) the new reality

• …where the production process is international,

• …with more complex structures/processes exist (outsourcing, flatter vertical integration…)

• …and where control and ownership become more dominant features than legal forms


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Linking systems together: business statistics and trade

• Global economies require data on who is trading and what are the characteristics of trade operators

• This question requires establishing a direct relation between foreign trade and industrial statistics.

• But these two statistical domains are based upon different concepts (products versus economic activities) and use different classifications (SITC, HS, ISIC, CPC).


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Linking systems together: business statistics and trade

• Central issue of such an analysis is to try to classify trade operators according to enterprise characteristics

• But this depends on the possibility of using or developing common identifiers between the trade register and the business register

• Countries largely differ in their ability to perform such a linking.


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The present situation The situation in Non-EU countries of OECD can

be summarized as follows:

•Six out of eight countries reported having a trade register, only 1 country reported having a formal trade register

•How is the trade register updated? Customs declarations provide the basis. In half of the responses there is a link to the Business Register and data from fiscal authorities is used as well


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The present situation (cont’d)•Which is/are the unit(s) of reference in the

trade register(s)? Enterprises and establishments constitute together with legal units the reference units used.

•Is there at least one common unit of reference between the business register and customs forms/register? All countries, except one, reported “yes”.

•Is (or can) the basic statistical unit of the business register linked to customs forms/ register of traders? Almost all countries reported that they can link the basic statistical unit to customs forms/trade registers


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The present situation (cont’d)•The situation reported was a mix of different

identification means, such as the tax registration number, name of the company and its address, the Business Register identification code.

• Although linkages do well exist, different reporting systems in countries inhibit to some extend linking.

• The risk of double-counting was acknowledged and the problematic measurement of multi-nationals was highlighted.


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The present situation (cont’d)•Have Non-EU countries of OECD carried out

any statistical matching exercise between the trade register and the business register?

•Only three countries reported to have done so

• The more systematic integration of the international dimension into business frames seems to be rather the exception than the rule

•This could be pursued as a development goal at international level together with countries


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Multinational enterprises (MNEs) and Enterprise Groups (EGs)

•Beyond the national territory, a statistical system needs to take into account more systematically the international dimension

•Foreign Direct Investment

•Foreign Affiliates Statistics

•Enterprise Groups, in particular Multinational Enterprises as new statistical unit


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FDI Flows and Stocks

•Foreign direct investment (FDI) is a key element in the rapidly evolving process of international economic integration. FDI creates direct, stable and long-lasting links between economies. FDI encourages the transfer of technology and know-how between countries, and it allows the host economy to promote its products more widely in international markets


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FDI

• Foreign direct investment (FDI) is defined as investment by a resident entity in one economy with the objective of obtaining a lasting interest in an enterprise resident in another economy.

• The lasting interest means the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence by the direct investor on the management of the direct investment enterprise. Absolute control by the foreign investor is not required, and ownership of 10% of the voting power is the criterion used.

• Inward stocks are the direct investments held by non-residents; outward stocks are the investments held in other economies.


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FDI – global trends

• The global environment for FDI improved in 2005 while at the same time corporate profitability was generally strong.

• Direct investment into OECD picked up in 2005 when inflows reached $622 bn.

• The United States and the United Kingdom were the main destinations for FDI in the OECD.

• Investment flows to EU countries also increased notably by 75% while half of the increase accounts for FDI flows into the United Kingdom, which tripled in 2005.

• Investments into China, amongst the foremost destinations of FDI, further progressed.

• The OECD area continued to be net outward investor at around $95 bn in 2005


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FDI


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Why Foreign Affiliates?

• Since the mid-1980s and with the quickening pace of globalisation of the economy, foreign direct investment has become central to worldwide industrial restructuring and one of the most dynamic elements of international transactions

• The need to assess the role and impact of direct investment, not only in financial terms but also in the context of its impact on jobs, sales and trade, has underlined the importance of having data indicative of the industrial activity of multinational firms

• To meet these new needs in analyzing the globalisation process, the OECD launched the regular collection of data on the performance of foreign affiliates in the manufacturing sectors of the OECD countries


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Foreign Affiliates

• OECD Definition: An affiliate under foreign control is defined as one in which

• A single foreign investor holds more than 50% of the shares with voting rights.

• The notion of control allows all of a company’s activities to be attributed to the controlling investor.

• This means that variables such as a company’s turnover, staff or exports are all attributed to the controlling investor and the country from which he or she comes. Control may be direct or indirect.


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Foreign Affiliates economic activity is significant in OECD countries: Employment in manufacturing and

services in affiliates under foreign control (as % of total employment, 2004 or latest available year)


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A new statistical unit is needed: the Enterprise Group (EG)

• EU 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 profit. 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.

• EUROSTAT is actively working on the EG Register


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EGs and EG-sub-groups: a scenario based upon real data

•The economic picture of a country crucially depends on the degree of inclusion or exclusion of statistical units

•France has launched in 2005 a major high-level project of re-designing its enterprise statistics system

•This project was carried out by the CNIS, the National Council for Statistical Information

• In April 2007, the final report was presented


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• Some conclusions:

• INSEE, the French NSO, will use this report for defining procedures to incorporate enterprise groups in the collection system of economic statistics

• An affiliate is no longer considered as an equivalent ot an enterprise unit

• An affiliate can not be considered as enterprise (lack of autonomy)

• A MNE has to be considered globally (an MNE and its branches think and define themselves globally)

• Many economic actors consider the EG (or sub-group of it) as the relevant unit of analysis

• Users want to analyse market realities, not hierarchical structures within EGs


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• The CNIS recommends the addition of a Global Statistical Unit (GSU) for EGs

• It is at this level where the strategic direction and decisions on affiliates are taken (mergers, acquisitions, investment, relocations etc,)

• This GSU is independent of national frontiers

• This logic of definition leads to a statistical representation of the national economy as the sum of all French GSUs world-wide


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•This approach is innovative in macro economic statistics since it goes systematically beyond the national territory (to our knowledge, only the BEA in the US has a similar approach)

•Most “traditional” economic statistics take the national approach in terms of national territory


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Simulation done by the CNIS in France

France World

(A)Foreign-controlled

Companies 2 M

(B)LegallyIndependantCompanies

6,3 M

(C)FrenchGroups2,1 M

(D) International French Groups: Df = 4,2 M Dw = 3,6 M


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•Truncated “Global Statistical Unit(GSU)”:

A+B+C+Df = 14,6 million salaried employees

•French truncated GSU

B+C+Df = 12,6 million salaried employees


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• “World-wide” French GSU:

B + C + Df + Dw = 16,2 million salaried empl.

• A world-wide “French” measurement, including the activities abroad from French EGs would yield 16,2 million employees, compared to 14,6 million in the “territorial” view; a plus of 1,6 millions


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Outlook

• This lecture has tried to shed some more light on the need to move towards a better integration of the international dimension into national statistical reporting

•Much need to be done and this includes the following:


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Updating the SNA

• to allow a better measure and integration of the increasingly global nature of economic transactions and arrangements. Particular attention should be paid to

• Goods for processing: the gross or net treatment would fundamentally affect the nature and size of trade in goods and services (goods or services)

• Government-owned foreign subsidiaries: recognize both the parent and the subsidiary as statistical unit

• Better measuring cross-border service flows


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International production processes necessitate a fresh look at international

trading and contracting• More an better data needed on re-exports

• More and better data needed on further processing and merchanting

• FATS => inward FATS alongside SBS needed, idem for a reduced set of outward FATS data (more difficult)

• MNEs => consistent definition of EGs needed and integration into registers• Profiling of domestic operations needed

• Difficulty: consolidation/deconsolidation of financial results of EGs


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A preliminary conclusion:

• Along with more consistent national data, greater international consistency with respect to concepts and definitions of statistical units is necessary, namely the addition of

• The enterprise group as unit of analysis

• …which is relevant for the analysis of MNEs

• …and which should be recognized and recommended in SNA as one statistical unit

• ... and should be integrated in national data collection systems


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Thank you for your attention!

Questions? => [email protected]

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