The Impact of Globalisation on the System of Statistical Units 1

1 The Impact of Globalisation on the System of Statistical Units 1 Jean Ritzen 2 Statistics Netherlands (SN) Division of Business Statistics PB 4481 6401 CZ Heerlen, The Netherlands jhg.ritzen@cbs.nl or jean.ritzen@gmail.com Abstract Statistical units have an important function in the processing of statistics. The United Nations and the European Union developed systems of these units, which are not fully comparable. The EU-system of statistical units is lead down in a special regulation: Regulation Nr. 696/93 of March 15, 1993. The economic world has heavily changed since then. Globalisation has influenced the way enterprises carry out activities and organise themselves. This applies large and complex multinational groups especially. For these it is supposed that the defined statistical units are not longer fully applicable as a basis for data collection and data processing into comparable statistical figures. Because of the worldwide scope, tuning of the several systems needs attention too. It is becoming common sense that profiling of large MNEs into adequate statistical units needs reconsideration of the systems. The paper will focus on the main issues and questions and will discuss the direction for solutions. This will be done in the context of the ESSnet on profiling large and complex MNEs, which has started in 2009. The main purposes of the ESSnet are the quality improvement of statistics, including the increase of efficiency of the statistical processes. KeyWords: Statistical Units, Globalisation, Euro Groups Register, Business Register, Profiling 1. Introduction 1.1 The EU statistical units regulation entered into force in March 1993. The regulation was the result of a discussion of many years. The several countries practise the definitions of the units in various ways however. It was the intention to have more coordination in statistics by the use of the same statistical units system in the EU Member States. The regulation on the activity classification (NACE rev.1) and the regulation on the Business Register were adopted at about the same time. Eight units are defined in the statistical units regulation. Three of these units are important in data collection and data processing, the Enterprise Group (EG), the Enterprise (ENT) and the Local Unit (LU). Other units are more or less for analytical purposes, for example for application in the National Accounts. These are the Kind of Activity Unit (KAU), the Unit of Homogeneous Production (UHP), the Local KAU (LKAU) and the Local UHP (LUHP). 1.2 The Institutional Unit is also defined in the regulation. This is important in the connection with other institutional sectors, for example families, in the economy and is mainly relevant for the statistical 1 All views expressed in this paper are those of the author and do not necessarily reflect the policies of Statistics Netherlands. An earlier draft version of this paper was presented at the Q2010 conference in Helsinki in 2010. 2 The author thanks all who contributed to earlier draft versions of this paper with their valuable comments.

2 description of financial processes in the economy. The seven other units are important related to the production parts and processes of the economy. The use of the units is specified in separate regulations. Important ones are the Business Register (BR) regulation, the Structural Business Statistics regulation (SBS) and the Short Term Statistics regulation (STS). The ENT and the LU play a major role in the regulated applications of today. The ENT is the central unit in the BR and in the SBS. The KAU is the basic underlying unit in some other regulations like the STS. 1.3 Other units systems were created in other parts of the world. The EU system deviates from the units systems described in the system of National Accounts (SNA) and International Standard Industrial Classification (ISIC). There are also differences with the Northern American and Asiatic systems. 2. Developments since the introduction of the SU Regulation 2.1 When the SU Regulation entered into force in 1993, it was well adapted to the situation of that time, but in the years after its introduction there were a lot of developments. The main reason for a critical review of the Regulation is because the social and economic environments have heavily changed, although there is also a wish for improvements or to repair for shortcomings in the Regulation. The process of internationalisation and globalisation has had enormous impact on the way businesses operate. This not only regards foreign trade, but also the internal operational organisation of large businesses. Except for fiscal, legal and other administrative reasons, national boundaries are not longer a criterion for organising the business. 2.2 The so-called MNE project, that run some years ago (2004-2006), showed that it appeared to be very difficult to get a good fit of activities of large international operating business in national statistics. It is even more difficult to have the data of these Multinational Enterprises (MNEs) in the national statistics of different countries in a consistent and comparable way, if possible at all in a pure national approach. One of the reasons can be in the statistical units definitions, but also in the way these are used in statistics compilation in the various Member States. The introduction of the Euro Groups Register (EGR) was a first step to improve the situation. The initial goal of this register is to get a full picture of the full composition of a MNE. This is supported by the revised BR Regulation of 2008, followed by the revision of the BR recommendations manual in 2010. 2.3 Although there are more reasons to have a critical review on statistical units to come to a revision of definitions, in this paper the approach is restricted to the reason from globalisation of large and complex MNEs. This is also part of the ESSnet on profiling large and complex MNEs that started in the end of 2009. This ESSnet is one of the projects of the EU MEETS 3 program. 2.4 Since 1993 there have been many initiatives to revise the SU definitions and regulation, but without a final conclusion till today. In 2001 a proposal for recommendations on revision was discussed in the EU Business Statistics Directors meeting. Another working group presented an operational definition of the enterprise for business statistics. But a decision is still missing. 2.5 Many analytical studies have been carried out on the EU statistical units system and on comparisons of the several units systems in the world. The use of the same term with different content leads to a lot of confusion. The term Enterprise is the best example for this. The definition of this term differs in the EU regulation from the UN-ISIC definition. The Enterprise unit plays a central role in the EU SU system. 3 MEETS: Modernization of European Enterprise and Trade Statistics

3 2.6 The EG, the ENT and the LU are to be considered as real actors which can be registered in the Business register. The other units are related to these and have a more analytical nature. If the definitions of EG, ENT or LU would be revised, the content of these other units will change accordingly without a change in their definitions. If the definitions of the EU units are subject of revision an additional goal could be a reduction of the number of types of units. 3. The today SU system in the EU according the regulation 3.1 The statistical units in the EU system can be showed in the beneath diagram that was created by Peter Struijs. The diagram shows the hierarchical relationships of the units. The relationship between the UHP and the IU is a bit strange. A relationship with the ENT, maybe via the KAU, would be more logic. As said, in the statistical part of the diagram the EG, the ENT and the LU are units that can be observed and registered, because these can be can be identified uniquely. The other have a more analytical nature. Diagram 1: The present EU statistical units EG Statistical World Administrative World Enterprise IU Legal Unit KAU Local Unit UHP Local KAU Local UHP 3.2 The hierarchical relationships between the units can be, in principle, 1:1, 1:n, n:1 or m:n. The direction of the relationships follows from the definition of the units. With restriction to the units EG, ENT and LU the relationships can be modelled according diagram 2. 3.3 The central unit in the regulation is the Enterprise. This is to be established based on supporting legal units (including natural persons carrying out economic activities). The LU and the EG are constituted from the enterprise. Although the national boundaries are not mentioned in the definition as a criterion for constituting the enterprise, in national practises the national boundaries are used because of the national domains for national statistics. Cross border units or activities of units are considered as third parties. Most important in the today definition of the EG is that the EG is determined bottom up as a combination of enterprises. This should be the key element for the revision and this revision will be a drastic change in the approach related to the insights of 1993. 3.4 The diagram 2 shows the model that fits with the definitions of the regulation.

4 Diagram 2: The relationships EG, ENT and LU, 1993 4 Legal/administrative world Economic/statistical world (Domestic) Enterprise Group (Domestic) Legal Entity (LeU) (Legal or natural person) Enterprise Local (legal) person Local unit To establish the enterprise (ENT) unit, we make use of the legal units that exercise, wholly or partially, a productive activity. The enterprise is the smallest combination of legal units (LeU) that is an organizational unit producing goods or services, which benefits from a certain degree of autonomy in decision-making, especially for the allocation of its current resources. An enterprise carries out one or more activities at one or more locations. An enterprise may be a sole legal unit. An enterprise group (EG) is defined as 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 profits. 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. The local unit (LU) is an enterprise or part thereof (e.g. a workshop, factory, warehouse, office, mine or depot) situated in a geographically identified place. Economic activity is carried out, at or from this place, for which - save for certain exceptions - one or more persons work (even if only part-time) for one and the same enterprise. 3.5 For small and medium businesses this model does not lead to problems, even if one can criticize the theoretical concept of it. In the period since 1993 the insights have changed, mainly because of the treatment of large businesses. The instrument of profiling has been developed, in some countries, for large businesses. 4 A triangle means one ore more entities can be linked to the entity on the other side of the line; A broken line means that entities could not fulfil the criteria to pass the borderline (e.g. from administrative world into the statistical world)

5 3.6 Profiling is a method to analyse the legal, operational and accounting structure of an enterprise group at national and world level in order to establish the statistical units within that group and their links, and the most efficient structures for the collection of statistical data. In profiling the units are the result of the analysis of the total combination of activities under common control. This means that the process starts with grouping all legal units which are under common control into the group and after this, the group is split into enterprises. In some documents we see already a definition that deviates from the official one of the regulation: The enterprise group is a set or a combination of legal units bound together by legal and/or financial links. (Doc. EUROSTAT/D1/BR/01-11/EN) 3.7 Making operational this definition is in applying the criterion that all legal units which are under common control constitute the enterprise group. The national boundaries are not mentioned as a criterion, although the unit constitution is restricted within the national boundaries, in most national practises in profiling. This is because profiling serves national statistical business registers, which are sample frames for the processing of national statistics. 3.8 In the same document it is stated that it would be more and more difficult, even dangerous, to delineate statistical units without referring to some extent to the enterprise group unit. By this especially the delineation of the enterprise units is meant. In applying this definition, the model as presented in diagram 2 will change into the model showed in the diagram 3. 3.9 For this model not only the definition of the EG should be adapted, but also the definition of the ENT. A proposal for a new definition could be: The enterprise is a sole legal unit (including a natural person), an enterprise group as a combination of legal units under common control or a part of an enterprise group, producing goods or services, which benefits from a certain degree of autonomy in decision-making, especially for the allocation of its current resources. An enterprise carries out one or more economic activities at one or more locations. 3.10 The enterprise will mostly appear as an organizational unit that can provide meaningful data for statistics from its bookkeeping reports or from other, maybe internal, information systems. 3.11 The big advantage of this approach is that all units under common control are in the enterprise group, regardless if these units are part of an enterprise. Some units will remain single institutional units serving some special functions within the group, for example financial special purpose entities (SPEs). According to this model it will be possible to split legal units, so parts of legal units can belong to different enterprises. There is no longer the restriction that a legal unit can belong to only one enterprise or that an enterprise should be a combination of legal units. 3.12 In the diagram the legal entity or unit (LeU) and the ENT could also be linked, but this would be for reasons of identification then. Units can only be identified by mentioning the legal units which constitute the unit or by referring to an agreement or contract on this with the business. 3.13 From the analysis of the Enterprise Group it can be concluded that one or more legal units are in it which will not belong to an enterprise or are not important in constituting an enterprise. These legal units can be dormant or have a special purpose (SPE) They must uniquely be identified and should be flagged for recognition. It is important that they remain recognised as part of the Enterprise Group. In the diagram the general term SPE is used for these. Dormant legal units are included in this category because dormant legal units can be activated by the group if desired for

6 some purposes. SPEs and (re)activated dormant legal units are important as separate Institutional Units. Diagram 3: The relationships EG, ENT and LU, revised Legal/administrative world Economic/statistical world (Domestic) Enterprise group (Domestic) Legal Entity (LeU) (Legal or natural person) Enterprise SPE (IU) Local (legal) person Local unit 3.14 A point of discussion can be how to count the number of enterprise groups from this model. Here more options can be distinguished: a. Units are only counted as EGs if more than one Legal Unit belongs to the EG; b. All EGs as a result of entrance of legal units (incl. natural persons) into the statistical area of the model will be counted as groups, regardless if only one or more enterprises belong to them. In this case the number of LeUs G number of ENTs G number of EGs. But it sounds a bit strange to mention a business of a natural person an EG. 4. A need for revision of the EU statistical units regulation? 4.1 As described in the previous paragraph the definitions of statistical units and the way the definitions are applied are already changing. The change is explicit for the definition of the EG. The way of thinking about the process of application of the definitions is changing from bottom up into top down analysis. For small and medium sized businesses this does not lead to big changes in outcomes and results in terms of constituted units. (Big) differences occur with large businesses and with businesses which operate internationally, often in a complex way. 4.2 Global or multinational operating businesses are part of the surveying population in all countries in which they carry out productive economic activities. This easily leads to inconsistencies and incomparabilities in data collection and compilation of statistics within and between different countries. The MNE project that was conducted in 2004-2006 showed these inconsistencies and incomparabilities. The

7 nationally collected data and compiled statistics differ from the country specifications as centrally provided by the MNE. The differences can have several reasons: - the data collection method, including sampling (primary data collection/use of data in administrative registrations); - the nationally applied definitions of variables; - differences of classification or the use of classifications; - errors in reporting data; - use of different types of units (e.g. enterprise or local KAU); - deviating (definitions of) statistical units (e.g. different criteria like that of autonomy); - deviating methods used in the consolidation of data; - decentralised (national) data compilation at MNEs. 4.3 The results of the MNE study were reported to the UN Statistical Commission. They concluded that further actions were necessary and proposed an initiative of the EU (Eurostat). The ESSnet on profiling large and complex MNEs can be seen as a part of these actions. This paper deals with the study of this ESSnet on the statistical units. 4.4 For EGs which fully operate domestically, the model of diagram 3 can be used. These EGs are also called All resident EGs. Although the definitions of the units still should be revised as described, the model also allows applying the definitions of the existing units regulation. 4.5 Two kinds of MNEs can be distinguished: MNEs which fully operate within the EU + EFTA 5 (EU+) territory and MNEs which operate globally, so in EU member states and outside the European territory. In the last group we have to distinct the EU+ territory and the Rest of the World territory. This is very important because the EU units regulation is only applicable for the EU Member States, although the EFTA countries, which not belong to the EU, mostly also follow and apply the definitions of the EU units regulation. In this paper the non-eu countries in Western Europe (for the EFTA countries) are included in the EU+ territory. For the Rest of the World territory other, and more than one other, systems of statistical units are applicable, for example the UN/ISIC system. 4.6 Consistency in data collection and statistics compilation regarding MNE can be considered at two levels: - At the EG level only; - In its whole global structure. 5. Consistency at the EG level only 5.1 Consistency at and within the EG level only means that it is known which parts of a group are operating in which countries in the EU legally. The whole group is known and can become part of statistics. Initiatives to reach this situation will exist with the establishment of the Euro Groups Register (EGR). The new 2008 business register regulation also enables mutual communication between countries on these MNEs. Full coverage of the registration of country parts of the EG leads the possibilities of full coverage in statistics. But still national approaches are applied in the delineation of the structure within the national parts of the EG resulting in national profiles of the domestic parts of the group. The situation is shown in the diagram 4. 5.2 The presentation of the EG in this model is already described in the revised business register recommendations manual 2010. The combination of legal units that forms the national part of a group is 5 EFTA countries: Iceland, Liechtenstein. Norway, Switzerland. These are strongly linked to the EU and operate in parallel

8 called the Truncated EG (TEG). This TEG is subject of analysis by the national statistical authorities to delineate the underlying national enterprises and local units, which all will be domestic now by definition. Diagram 4: The introduction of the multinational dimension, full coverage at EG level 6 Legal/administrative world (global) Economic/statistical world (global) Economic/statistical world (sub-global) Legal/administrative world (sub-global) Legal unit Global Enterprise National part of Enterprise group ( truncated EG ) Legal or operational unit (sub global) National enterprise SPE Local (legal) unit Local unit Local unit (legal or operational) 5.3 Although this is a good start for improvement of international consistency and comparability of MNE data in statistics, it cannot be considered as a well satisfying final solution. Different national approaches in the constitution of the underlying units remain. Also data collection and data processing are carried out according national approaches and procedures. 5.4 The main advantage lies in the full view on the MNE (within the EU), which will be improved further from the improvement of the EGR and the communications in its context. Without a global insight in the relationships between legal units (LeU), it is not possible to know the real TEG. The UCI (Ultimate Controlling Institution) will also be known from the EGR. The UCI constitutes the nationality of the TEG, what is important for FATS (Foreign Affiliate Statistics). 5.5. The approach according to this model does not affect the national responsibilities in data collection, data processing and statistics compilation. The EGR is mainly an important tool for improvement. 5.6 The ENT is the central statistical unit in most statistical regulations like SBS and STS. The model as presented in the diagram 4 does not lead to a solution to reach the desired consistency and comparability. Not only has the constitution of the Enterprise unit remained nationally, but also the assignment of the characteristics to the units. 6. A generalised multinational statistical units model, globally consistency 6.1 A step in the direction for full consistency and comparability is a Generalised Multinational Statistical Units model. In this model a MNE will be profiled globally what should be done centrally. The most 6 National in the diagram can also be other geographical areas (e.g. Benelux, the Euro area, EU, Rest of the world)

9 probable place to have the lead for this is the statistical agency of the country in which the UCI residents. In the case the UCI is outside the EU a choice has to be made. In profiling the aspect of the borders or boundaries should be disregarded. After constituting the global enterprise(s), the national parts of this will be defined for processing in the national statistics. The national parts keep the characteristics of the global unit but for national purposes the introduction of double or multiple coding according to the classifications can be useful. It will be important that all countries in which MNEs have relevant activities to a large extent are involved in the profiling by the responsible agency. Mutual communication will be big factor of success in this approach. 6.2 The generalised multinational statistical units model is shown in diagram 5. As a consequence of the term truncated EG, the term truncated ENT is used. It is defined as the territorial part of the global enterprise, which can be a country, but also the full EU region. Diagram 5: Proposal for generalised multinational Statistical units model Legal/administrative world (global) Economic/statistical world (global) Economic/statistical world (sub-global) Legal/administrative world (sub-global) Legal unit Global Enterprise group Truncated Enterprise group Legal or operational unit (sub global) Global Enterprise SPE SPE Truncated Enterprise Local (legal) unit Local unit Local unit Local unit (legal or operational) 6.3 Introduction of this model leads to a great improvement of consistency and comparability, but it has serious consequences. National agencies are no longer full responsible for the units delineation within their countries, but must follow the units delineated by the responsible statistical agency of the country to which this responsibility is assigned. It seems to be logic that this is the country in which the UCI residents. Good co-operation and mutual consultancy will be important. 6.4 The introduction of this model would be a logic next step in the development of the EGR. Results of global profiling should be stored in this register and from this the national statistical authorities can take the information on MNE structures for their national purposes and can also give feedback. 7. The introduction of the new approach 7.1 The ESSnet on profiling Large and Complex Enterprise Groups has the proposals for the approach adopted. It is now testing it with a number of very large MNEs. Tests are being done by countries/nsis

10 which are partner of the ESSnet. First experiences are encouraging, but there are a lot of issues which need further elaboration. 7.2 One of the important issues is the application of the criterion of autonomy in the enterprise delineation, although this is not new. How to get a good balance in the fulfilment of the statistical requirements and the possible details in units delineation? Very large groups report globally according the operational segments. These are seen as a very good starting point in the analysis, but for statistics a more detailed level may be desired. An aspect of the solution is in the communication with the MNE itself. The MNE will be partner in the process. This is the more important to discover the availability of the necessary meaningful data for statistical use. In testing the availability of the main core variables is checked and where to collect these. 7.3 For the implementation and tests guidelines are needed and being developed, which will be used by all countries which will be involved in the profiling process. A distinction can be made between guidelines for NSIs of the country of the UCI and guidelines for the NSIs of the partnering countries, who have to check and comment proposals done by the UCI country. The partnering countries are the countries outside the UCI country in which the MNE has operational activities. Well developed communication with all stakeholders appears also to be a key factor of success. 7.4. A number of stakeholders can be mentioned: - The MNE itself; - The Euro Groups Register; - The statistical users, which are the statisticians who should use the established statistical units for their statistics (BR, SBS, STS, FATS, National Accounts); - The NSI of the UCI country; - The NSIs of the partnering countries. 7.5 Guidelines must describe how to deal with SPEs, how to deal with auxiliary and ancillary units of globalised Groups, and how to deal with R&D activities. Initial proposals are being drafted and are being used in the started tests. 7.6 An important issue is the pressure that exists between the wish to reach international consistency and the fulfilment of statistical national requirements. The introduction of a double coding system for the activity classification is an example of a possible solution regarding this aspect. 7.7. The introduction of the approach within the EU is only a partly solution of the problem of inconsistent statistics. The problem has a wider scope, because MNEs do not restrict themselves within the EU borders. 7.8 The introduction of a new approach has always consequences for time series. It always leads to disruptions or breaks in these. Discussions are started if the introduction should be done gradually or by a kind of big bang. It is very doubtful if the last option is a real one. 7.9 Benefits and costs of the introduction of the new approach has to be researched further. Benefits are mainly in quality improvement of statistics and expected response burden reduction at MNEs. Profiling is a costly activity and there will be initial costs of investments especially. The research to costs is also an aspect of the tests.

11 8. Main conclusions and challenges 8.1 The ESSnet on profiling Large and Complex MNEs started at the end of 2009. In 2010 a feasibility study was done and a first proposal for an adapted statistical units model was prepared. These were the input for methodology development and guidelines. Partners of the ESSnet started testing the new approach in 2011. 8.2 Some main conclusions are: - Globalisation leads to the need of adaptation of systems (frames and processes); - There will be more and more mutual interdependencies between countries. The consequence will be that countries themselves will have less independency; - Globalisation goes beyond European boundaries, which leads to a need for tuning different statistical systems (e.g. EU and UN); - Profiling MNEs requires national and international communication and co-operation; - Statistical units delineation is a statistical activity and needs to fulfil statistical requirements. The statistical users of the profiling results are important stakeholders and should be partners in the process; - Implementation using prototyping approach and Revision SU-regulation is to be considered; - More MNE commitment because of recognition; - Lower response burden at MNEs (after initial investments); - Double coding can contribute in bringing together (sub)global and national interests. The Euro Groups Register will have a crucial role as a future instrument for international coordination. Results of profiling must be registered in it. 8.3 Some main challenges are : - Proving the approach by testing followed by adoption and implementation; - Further development of methodology and guidelines; - Invitation to all EU-countries to adopt the new approach and to join in testing this; - Communication with non-eu areas to discover and discuss possible partnering in the approach (nevertheless different units systems); - Implementation of the new approach: gradually of big bang? How to deal with disruptions of time series? 9. References EU, 1993: Council Regulation (EEC) No 696/93 of 15 March 1993 on the statistical units for the observation and analysis of the production system in the Community EU Eurostat (Francois de Geuser), 1998: The Impact of Globalisation on Statistics. Paper presented at the 12 th meeting of the International Roundtable on Business survey Frames (Wiesbaden Group), Helsinki September 1998 EU Eurostat, 2010: Business registers recommendations manual. Luxembourg 2010 http://epp.eurostat.ec.europa.eu/cache/ity_offpub/ks-32-10-216-en-c/en/ks-32-10-216-en-c- EN.PDF P. Struijs, 2006: Comparability of Business Statistics. Paper presented at the European Conference on Quality in Survey Statistics (Q2006), Cardiff April 2006 Task force on "statistical units": the importance of country-specific considerations in the discussion about statistical units, Peter Struijs, CBS Netherlands, Doc. STAT. UNITS/01/30/EN, 6 December 2001 UN, 2009: System of National Accounts 2008. New York 2009

12 Working Group on Business Registers, 2001: Statistical units. Doc. EUROSTAT/D1/BR/01-11/EN, 9 June 2001 Working Group on Business Registers and Statistical Units, 2004: Result of the working group on Statistical units: An operational definition of the enterprise for business statistics. Doc. ESTAT/B1/BR/04-10/EN, 14 May 2004 Working Group on Business Registers and Statistical Units, 2008: Statistical Units Regulation 696/93; planning the revision of the Regulation. Doc. ESTAT/G1/BR/2008-10/EN, 30 September 2008