Factoryless goods producers Task Force

Transcription

1 Unit ESTAT B5 : Central data and metadata Meeting document CLASSTF/2015/4 Factoryless goods producers Task Force Luxembourg, 10 November 2015 BECH Building, Room B2-404 ITEM 4 OF THE AGENDA OUTSOURCING TYPOLOGY Page 1

2 1. Introduction Outsourcing is in fact the contractual agreement according to which the principal requires the contractor to carry out specific tasks, such as parts of a production process or even the complete production process, employment or ancillary activities. The principal and the contractor may be located within the same economic territory or in different economic territories. The actual location does not affect the classification of either one of these units. The term "sub-contracting" is often used as synonym for "outsourcing" although outsourcing is somehow a subset of subcontracting. The main challenge we face with outsourcing is the myriad of forms it can take. In the Eurostat handbook on outsourcing a large number of outsourcing arrangements (mainly based on the sector of activity) have already been identified (see annex 2) but we now notice that among those which outsource the complete manufacturing production process, we can also find FGPs as a "new" type of outsourcing. Furthermore, for contractors we can also distinguish those who may not sell their products to anyone else from those who are under contract with FGPs. For this reason, the UN Technical subgroup on ISIC, at its October 2014 meeting, considered the need of developing a typology of the various arrangements for the production of goods. 2. Typology proposed by the Task Force on Global Production The Task force on Global Production has already elaborated a Typology of global production arrangements and transactions involved (see annex 1). The elaboration of this typology has as main aim to give an indication of how much control (and the associated risk) a principal has over the production process. However, it should be noted that in the real life various arrangements may be brought together into one global value chain and at the same time. Furthermore, multinational enterprises may rearrange their global production from one day to another. The present typology concerns mainly global arrangements linked to manufacture but likely a further expansion of arrangements to other sectors would be needed. There are cases where land is simply leased out for purposes of agriculture production and the entire harvest is directly shipped to the country holding the lease. Similarly, small island states have been issuing fishing licenses to foreign vessels, which fish in their waters, but sell fish in international markets as frozen or processed. The main objectives of developing this typology were the following: - It supports the proper breakdown of economic activities along the global production process on a country-by-country basis. - It helps in assigning the kind of economic activity of a principal and a supplier - Assists in identifying the economic ownership of inputs, outputs, and intellectual property for the activities along the production process. Page 2

3 - Helps identify the type of output (goods, trade margins, ) of the participating units in the global production arrangement. The typology refers to global production arrangements. In many cases outsourcing is involved but not always. In the typology we can find the following types of arrangements: - Goods sent abroad for processing Global production arrangement where the principal owns the materials and purchases manufacturing from a foreign supplier to transform the physical inputs into another product. Over the course of the transformation process, the principal maintains economic ownership of the processed raw materials or semi-manufactured goods as well as the goods after processing. The supplier only receives a processing fee which is not the full value of the final good but represents the reward for producing the good. - Goods under merchanting Under this arrangement enterprise A buys a product from supplier B and resells it without further transformation. Enterprise A does not provide any of the material inputs or any information to the supplier to help design the product. - Factoryless goods production Such enterprises supply inputs of intellectual property products (IPPs), e.g. technology, know-how and product design, but fully outsource the material transformation process required to produce the output. - Fragmenting part of production of, IPPs The enterprise providing the service remains in control of the production process and owns the intellectual property used in production, as well as the intellectual property as output of the production process but outsources part of the service. For example, a software firm in Country A receives a contract to design customized software for another company in Country B. The software firm in Country A employs in-house computer programmers to write the application, but also hires computer programmers located in Country C to develop certain features of its application. - Fragmenting part of production of, excluding IPPs The enterprise providing the service remains in control of the production process and owns the output associated with the service produced but no are related to IPP. For example, an accounting firm in Country A receives a contract from a company in Country A to audit the company s financial statements. The company to be audited has a subsidiary in Country B. The domestic accounting firm in Country A uses domestic employees to perform auditing of the unit located in Country A. Because in many parts of the world accounting firms are required by law to be locally owned and independent, the accounting firm in Country A must contract with another accounting firm in Country B, where the subsidiary is located, to perform the auditing service for the subsidiary s financial statements. - Subcontracting production of the principal may outsource (part of) its provision. Under certain conditions, such an arrangement could be considered in some ways similar to merchanting of goods, particularly when the are purchased and resold without any significant transformation. - Direct Investment Enterprise not directly engaged in producing goods or Direct investment enterprises are not directly engaged in the production of goods of. Purely direct (foreign) investors are not engaged in production at all. Holdings and head Offices are examples. Page 3

4 The main criteria underlying the classification are: - Economic ownership of the input materials; - Economic ownership of intellectual property embedded in the product or service; - Economic ownership of the output; - Whether the output is a good or a service. 3. Typology proposed by the Task Force working on the Outsourcing Manual In 2008 a manual providing definitions and rules for the classification of units outsourcing their production was published as Annex 2 to publication "NACE Rev. 2 Statistical classification of economic activities in the European Community". This manual was updated in 2014 and supplemented the rules originally published in However, the new manual doesn't contain new or modified rules. Changes aimed only to make the rules and guidelines clearer and more operational answering to a certain number of questions from the Member States on how to apply the rules. Annex 2 synthetises the different rules proposed which are essentially based on a sector of activity approach. 4. Do we need to update our Outsourcing typology? Although the two typologies follow different objectives, there are clear overlaps in the identification of types of outsourcing arrangements. The members of the FGPs Task force should: - Identify the gaps between the Eurostat Typology and the Task Force on Global Production typology - Verify the exhaustiveness of the outsourcing arrangements proposed and complete the typology if necessary. Page 4

5 Annex 1: Typology of global production arrangements and transactions involved. Description of production process from point of view of domestic entity Entities involved Economic activity ISIC Economic ownership of Type of output Materials Intellectual Property Output A. Goods sent abroad for processing (Principal) Manufacturing Manufacturing X X X Goods B. Goods under merchanting C. Factoryless goods production (recommended treatment) Manufacturing service provider Manufacturing Merchanting Trade X (Margin on Goods) Manufacturing Manufacturing X X Goods Merchanting Trade X X Principal (Margin on Goods) Manufacturing Manufacturing X Goods D. Fragmenting part of production of, IPPs (Principal) X X E. Fragmenting part of production of, excluding IPPs F. Subcontracting production of (Principal) (Principal) Purchase and sale of service without any significant transformation of the service between purchase and sale X X G. Direct Investment Enterprise not directly engaged in producing goods Financial and Section M business Manufacturing Manufacturing X X X Goods H. Direct Investment Enterprise not directly engaged in producing Financial and business Section M X X X Page 5

6 Annex 2 : Typology defined in the Eurostat Outsourcing manual Page 6

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