Towards a systematic approach to MNEs: linking cross domain activities and data

1. DGINS Conference Bratislava, 10 October 2019 Towards a systematic approach to MNEs: linking cross domain activities and data Gian Paolo Oneto, Director Directorate for National Accounts

2. Outline of the presentation • The scope for a systematic approach to measuringMNEsactivity • A case study: the impact of a specificMNE restructuringon Italian STS indicators • Register-based firmlevel data linkage as a strategicinfrastructure in monitoringMNEs • Integrating information and methodologiesfrom differenteconomicdomains (STS, SBS, NA, BoP) to progress towardsconsistentlyclassifyand measureMNEsoperations • The GNI project as a first building blockof the new knowledgeinfrastructureneeded to cope with MNEsoperations in compilingofficialstatistics • The keyissue of identifying and measuringIPPsownership • Developingmanylayers of co-operation to build a globalisedstatisticalcounterapartto MNEs

3. The scope of a systematic approach to MNEs NSI NA units SBS units STS units MNE Corporate restructuring Central Bank Direct reporting BoP MNE Sources of inconsistency 3

4. A recent case study on the impact of MNE restructuring on STS indicators • This case study is limited in scope. It only concerns STS indicators and potentialeffects on NA and Boprecording. However it clearlypoints out the importance of data linkage and knowledge sharing acrossdifferentstatistical domains. • In the second part of 2018 a global corporate restructuring process of a large foreignowned MNE affecteditsforeign affiliate operating in Italy in the production and export of pharmaceutical products • Short terms indicators for this sectorstarted to progressively diverge in the first semester 2019 signalling the presence of potentialbiasesin the data and in the derivedstatistics. 4

5. A business case • Our (small) LCU coordinated the micro-data integrationacross STS surveys, analysedfinancialstatement records to identify the sources of potentialinconsistency and interviewed the foreign affiliate to obtainfurther information • Inconsistency in data across STS domains was checked with respect to domain specificdefinitionsand linked to explanationsprovided by balance sheetanalysis and the interviewwith the foreignaffiliate: issuesrelated to change of ownership of raw materials both globally (from outside Ue to a Ue MS) and domestically (from the MNE domestic resident manufacturing unit to SPEs set up in Italy for fiscal purposes). • The outcome was that the signalswerecorrectlyclassified by eachSTS domain according to currentdefinitions and an explanation for data users was made available. The monitoring of foreign trade flows related to SPEs was intensified and contact with NA are in progress on how to report the presence of trade with SPEs. 5

6. The relevance of data integration • Firmlevel data integration of STS microdataacrossdifferent domains was crucial to detectpotentialanomaliesacross business units • The total value of exports shifted from one unit to the other but remain consistent for the total of MNE (resident and not resident) units in Italy; signal for the EWS • Potential implications for NA and Bop (notwithstaing financial statement reporting seems correct) • This is a relatively simple case study. However some warnings emerge: • Active cooperation with MNEs is not guaranteed whilst information available at the foreign affiliate level is limited. • Data integration does not always provides all the information needed, such as data related to processing services. • The combination of the previous two elements can make the correct evaluation not feasible at the national level 6

7. A Register-based firm level data linkage as a strategy for monitoring of MNE operations business case • Istat has intensivelyinvested over the last few years in the set up and maintenance of an integrated system of register whichincludesbasic and extendedregisterssupportingthe compilation of both national and territorial SBS estimates and National Accounts. • Limited efforthas beendevoted so far to the integration of firmlevel data in the STS domaingiven the difficulties of obtainingconsistentfigures from different survey designs. • However the high informative power of STS micro data in general, and foreign trade statistics basictransactions in particular, in spottingrelevantchanges in MNEsoperationsshould be betteracknowledged and exploitedasshown in the business case. 7

8. Integrating knowledge on MNE activities from STS, SBS and NA business case • Over the last two decades, given the increasingexposure of business data to globalisatoneffects, Istat has developped some skilledprofessionalfigures in classifying and analysing data linked to a sound understanding of MNE operations and corporate restructuringprocesses. • However, thosecompentenceswerefragmentedacrossdifferent domains and surveys, notablyforeign trade, FATS data, Enterprise group registers, National Accounts. • Eu projects such as profiling, Early Warning System, LCU, Action Plan SBS and GNI provided a relevantpushfactorto increasingly coordinate and integrate this group of globalizationrelatedexperts 8

9. The participation to the GNI MNE PilotExercise: an importantstepahead for NSIs business case • All the information on MNEsoperations and statisticalcapabilities in dealing with themhavebeenseverelytested in the 2018/2019 round of the Pilotexercise, raisingsubstantially the awarness of the issuesathand. • Istat hasstarteddevelopingapproaches and proceduresneeded to deal with the large host of issues to be faced in treatingconsistently the activity of MNEs in the keydomains: BRs, business statistics, National Accounts, Balance of Payment. • Eachpilot case developed (bothas leader and as partner country) hasenhanced the kwnoledge on how to profilethe MNE goup, how to track the relevant information (evidencingimportant information gaps) and, aboveall, on methodologicalissues to be tackled in arriving to sound and consistentmeasurement of the involvedvariables 9

10. The success in measuring MNEs operations depends on many key players Central Banks or BoP compilers Business Register MNEs Business Statistics OtherEconomicplayers National Statistical Offices National Accounts National Fiscal Agencies/administrative data providers 10

11. The crucialroleplayed by Eurostat in the PilotExercise • Launching operational tools • The cooperation mechanism between countries for the Pilot Exercise: • Secure exchange of information platform (S-Circabc) • Developing an environment for preserving confidentiality – Code of Conduct • Favouring cooperation • Within the National Statistical Office between different statistical domains crucial for good quality of national accounts. • Between NSIs in measuring statistical variables (above all in NA) deriving from the activity of common MNEs • Between NSIs and Central Banks that compile BoP statistics 11

12. Main issues emerging in the measurement of global economic flows The implementation of Manual and International Regulations (SNA , BPM, ESA..) requiresdecisonregarding : • GFCF • Import • Export • Compensation of employees • Labour input • Ownership (of input, output, IPP) • Economicactivity • Residence of units • Domestic production • Domesticvalueadded decisionprocess In order to correctly implement the principles information requirements are very demanding 12

13. A quick focus on the biggest issue: the economic ownership of IPPs Due to the intangible nature of intellectualpropertyproducts (IPPs) – by definition hardly localized – the identification of economic ownership of IPPs within MNEs may present significant measurement difficulties, first of all at national level The UNECE guide to measuring global production highlights some characteristics of IPP flows that under certain conditions could help national accounts compilers to identify the ownership of an IPP within MNEs and within global production arrangements. The guides includes a decision tree to determine the economic ownership of IPPs. However the implementation of the principle of economic ownership is far from straightforward 13

14. A quick focus on the biggest issue: the economic ownership of IPPs To apply the decision tree, in ISTAT a number of data sources have been explored, but the information available proved to be not comprehensive enough: hence, a specific survey module has been tailored to gather some necessary elements and included in the questionnaires of Structural Business survey on large enterprises for the year 2016 and 2017 (with a fine tuning in the second yearly wave). The results highlight some challenging aspects due to the particular characteristics of IPP: a) strategical location of IPP is not an information that MNEs are usually willing to share; b) statistical definitions and terminology adopted in the stat community are not immediately clear to MNEs; c) the specificity of information requires a direct contact with MNEs in order to optimize the exchange. In this respect a framework (gentleman agreements + legal guarantees?) could help developing a relationship between NSIs across EU and MNEs. 14 Bratislava, 10 October2019

15. What we have learned from the experience A micro (unitlevel) approachisstrictlyneeded: to assuregoodquality and consistency of national accounts (GDP, GNI, Investments in R&D..) exchange and comparability of data concerningunitsthat are part of MNEs with MSsinvolvedisnecessary Access to administrative data isveryimportant: the statisticalauthorities do nothaveaccess to fiscal country by country data base (BEPS). Efforts are needed to accesskey fiscal information for statisticians Direct contacts with the MNEsiscrucial: bothrelational and legalinstrumentsmight be nedeed What we have learned from the experience 15

16. What National Statistical Office have to do • Steering the design of the nationalstatisticalsystem – and specifically the economicdomains - towards a new model grounded on consistency of information concerningglobalisedcorporations • Establishing a legalenvironmentenabling data exchangebetween the statisticalauthorities (NSI, Central Bank) and among EU NSIs • Developing a institutional (and legal) frameworkaswellas a workingpracticehelping the cooperationwhithunitsbelonging to MNEsoperating in the Country 16

17. What Eu Economic and Statistical Authorities can do Work for establishing a full-fledged legal and institutional framework aimed specifically at enabling standard data sharing practices concerning business units operating in different Eu Countries; the role of this framework must be developed with all the shareholders of economic statistics (including business representatives) Leading Eu levelcommunicationinitiativestargetingMNEs in order to clearlyexplain the role of corporation information in statistics (and theirindependence from fiscal authorities) Streamline and makeoperational the set of methodologicalprinciplesestabilished by OfficialManuals and make work feasible and less ambiguous (mainly for national accounts compilers) 17

18. Makingavailable to users new information: further breakdown in National Accounts • The Institutional accounts set out the interactions of the domestic economy with the rest of the world • It is possible to start to work on different kind of aggregations of units considering the Subsector of (financial and non financial) resident enterprises belonging to MNEs. • Why is it informative? • Know more about the impact of the globalization on domestic economy • Measure the impact of the rest of the world on domestic economy • Improve the analyses of global production and GVC 18

19. Additional information requirementsfor building MNEs accounts • Economic flows activated by units that are part of MNEs • Intragroup flows with units resident in the RoW: • Imports of goods and services by counterpart enterprise/country , • Exports of good and services by counterpart enterprise/country • Transfers with GG Sector • Information concerning interaction of units belonging to MNEs with other institutional sectors 19

20. Concludingremarks • The integration of firmlevel information from STS, SBS and BRs can provide a usefuldata infrastructure to identifychangesin MNEsoperations and strategies. However, limited cooperation with some MNEs and lack of relevantinformation hinderthisstrategy. • The integration of knowledge and skills on globalisationwithinthe NSI isimportantto produce consistentestimatesacrossdifferentdomains. • Proposals for developpinga systemof business statisticsable to cope with the measurementchallangesinduced by globalizationshould be carefullychecked and expanded to encompass NA (and BoP) information needs. • A reinforcedinternationalcoordinationiscentralbothto expand the monitoring system and to developharmonisedbutfeasibleguidelinesfor a consistenttreamentof MNE operationsacrossdomains and acrosscountries. • New statisticsconcerning the globalised economy are needed: itisworthfocusing on the Subsector of resident enterprises belonging to MNEs 20