National Accounts Globalisation and Business Surveys Robin Lynch

National Accounts, Globalisation and Business Surveys Robin Lynch UK Office for National Statistics

Globalisation and national accounts • National accounts aim to measure the economic activities of a nation • Multi-national activities are a measurement problem for national accountants

Globalisation and national accounts • Once upon a time – People lived in a sovereign state – People worked in the state – All of production was in the state – Output was sold in the state – staters bought state produce

Globalisation and national accounts • People lived in a state But now • People leave their country (migration) • People have second homes (residency) • People live abroad some of the time • People holiday and spend a lot of money abroad

Globalisation and national accounts • People worked in the state But now • People work abroad • People work in many places in the world

Globalisation and national accounts All of production was in the state But now • Multinational companies span the world • • Design centre in UK Production in Eastern Europe Marketing in United States Financial centre in The Netherlands

Globalisation and national accounts • Output was sold in the state But now • Output is sold abroad • Output is sold to foreign tourists • Output is sold on the world wide web

Globalisation and national accounts • consumers bought local produce But now • We buy from abroad • We buy as we travel abroad • We buy on the internet

Globalisation and national accounts • Intellectual property • Created on site • Shared amongst many • Can we measure a capital service between countries?

Globalisation and national accounts • The EU is different • Economic statistics are used for fiscal targets • Accuracy more important than appropriate • Market transactions are measurable

Globalisation and national accounts • New SNA update globalisation challenges • Goods for processing • R & D generates intellectual property assets • 20% - 10% ownership rule for FDI

Multinational Insurance • A multinational insurance company corporation has • a head office and computer centre in Canada • a help call-centre in India and • sales in the UK

Multi-National Production account Uses Resources Material 50 costs Computer x services Call-centre y services Wages 100 Profits 50 Sales Computer services Call-centre services 200 x y

Example Multinational Insurance • Let the value of the computer services to the rest of the group be 10, 5 to the sales activity in the UK and 5 to the call-centre activity in India. • Let the value of the call-centre services to the UK sales activity be 20

UK Production account Uses Material 40 costs Computer 5 services Call-centre 20 services Wages 80 Profits 55 Resourc es Sales 200

Canada Production account Resources Uses Material costs Wages Profits 5 Computer services 15 -10 10

India Production Account Uses Resources Material costs Computer services 5 Wages 5 Profits 5 5 Call-centre services 20

Example Multinational Insurance • Now suppose tax on profits is higher in the UK than Canada. To reduce the global tax burden, the company accounts showing each site separately re-values the computer services to the rest of the group from 10 to 50, of which 25 to the UK and 25 to India.

New UK Production account Uses Material costs Computer services Call-centre services 40 Wages 80 Profits 35 25 (5) 20 Resources Sales 200

New Canada Production account Uses Material costs Resources 5 Computer services Wages Profits 15 30 50 (10)

New India Production Account Uses Resources Material costs Computer services 5 Wages 5 Profits -15 25 (5) Call-centre services 20

Example Multinational Insurance • So the profits centre values have changed from Old UK Canada India New 55 -10 5 35 30 -15

Example Multinational Insurance • And the GDP values have changed from Old UK Canada India 135 5 10 New 115 45 -10

Globalisation and national accounts • National business surveys can no longer collect market sales and costs • Transfer pricing to minimise global tax burden undermines traditional methods • How can we retain the status quo?

Globalisation and national accounts • Ask firms to estimate an “arms-length” value for non-marketed internationally traded goods and services within the multinational • Use these values to produce a traditional production accounts for the national activity

Globalisation and national accounts • OR • Change the mind-set – step outside the box • Are we attempting the impossible? • Do national production functions mean anything? • Can we measure productivity for national economic activity?

Globalisation and national accounts • Can we collect the necessary data? • Will multi-nationals cooperate (and so reveal their tax engineering activities)? • Even if they wanted to, how can they estimate the value of non-market transactions?

Globalisation and national accounts • What’s the alternative? • Use the income approach • Measure the employment income of the activity • Estimate the operating surplus as the sum of returns to capital assets plus the “entrepreneurial turn”

Globalisation and national accounts • Can we measure return to capital within national boundaries? • How do we estimate entrepreneurial turn? • How do you estimate national return on capital for intellectual property accessed across national borders • No answers – but worth exploring these issues

Globalisation and national accounts • GDP through expenditures • Reduce business surveys and bump up consumer surveys and other demand sources • Make more use of administrative sources (often tax sources)

Globalisation and national accounts • The way ahead for business statistics • Use multi-national supply-use frameworks to ensure consistency • Cut this up to get country pictures, rather than building the international picture like a jigsaw of country estimates

Globalisation and national accounts • Eurolinks and Eurogroups Register • European registers of multi-national companies will keep data on ownership and links of control between legal units in the EU • A Community register of multi-nationals will be introduced from 2008

Globalisation and national accounts • The defence • Large business units • International cooperation • Profit centres • Transfer pricing – standard methods

Globalisation and national accounts • For national accounts, business surveys less important in the future • Concentrate on income and spending (good old days) • Try harder on tax sources

Globalisation and national accounts The message GOOD LUCK to Business Survey statisticians