1. Ownership criteria

4.17. Although GATS does not provide statistical definitions, it does give some indication of the kind of ownership criteria that would be useful in support of the agreement. The agreement refers to concepts of “ownership”, “control”, and “affiliation”. Under GATS, a juridical person (such as a business enterprise) is “owned” by persons of a WTO member country if more than 50 percent of the equity interest in it is beneficially owned by persons of that member country; “controlled” by persons of a member country if such persons have the power to name a majority of its directors or otherwise to legally direct its actions; and “affiliated” with another person when it controls or is controlled by that other person, or when it and the other person are both controlled by the same person (article XXVIII, section [n]). Thus, GATS would appear concerned with cases of majority ownership—where, by that very fact, control typically could be assumed to exist—as well as by cases in which control can be demonstrated to have been achieved with a smaller ownership share.

4.18. Among statistical guidelines, rules relating to ownership appear in BPM5, in BD3 and in the 1993 SNA. All of these use ownership of 10 per cent of the ordinary shares or voting power (for an incorporated enterprise) or the equivalent (for an unincorporated enterprise) as a lower threshold for direct investment, but they also provide rules that are more closely aligned with the ownership and control concepts found in GATS. All three of these harmonized standards define “subsidiaries” as enterprises in which the direct investor owns more than 50 per cent, “associates” as enterprises in which the direct investor owns between 10 and 50 per cent, and “branches” as wholly or jointly owned unincorporated enterprises. In the 1993 SNA, subsidiaries and branches are considered to be “foreign-controlled enterprises”; associates may be included in, or excluded from, this category by individual countries according to their qualitative assessment of foreign control.

4.19. The present Manual considers that it is relevant to consider criteria used or recommended at national and regional levels. Here majority ownership—that is, cases in which the direct investor owns more than 50 per cent of the ordinary shares or voting power in the direct investment enterprise—is seen to have played a key role in determining the subset of foreign affiliates that is covered. A report of a Eurostat task force on foreign affiliates trade indicated agreement by its members that the criterion of majority owned would be used because the concept is very clear and in this way very operational.⁶⁰ While the report indicated other criteria that could be used in identifying foreign-controlled firms, actual collection of FATS statistics by Eurostat and OECD has been based on majority ownership; in particular, the Joint OECD-Eurostat survey on the activity of domestic firms and of foreign affiliates in the service sector requests that the data reported should relate to majority-owned affiliates. Among the few national presentations, the United States annual presentation of data on sales of services by affiliates covers data for only those affiliates that are majority-owned by direct investors.⁶¹

4.20. Although it may in some respects have been conceptually more appealing to categorize firms on the basis of the actual presence or absence of foreign control, majority ownership of the ordinary shares or voting power by a single direct investor or by an associated group of investors acting in concert has been selected as the recommended ownership criterion for FATS statistics in the present Manual.⁶² Unlike control, its implementation does not require the use of subjective criteria, nor does it require that compilers examine the nature of investments on a case-by-case basis. The absence of a subjective factor has the added benefit of eliminating a potential source of bilateral asymmetry -namely, the possibility that the issue of control will be assessed differently by home- and host-country compilers. Finally, majority-owned foreign affiliates do fall within the scope of GATS definitions of ownership and - all but the rarest instances, typically involving highly regulated economies - control.

4.21. Although the measure of majority ownership recommended by the present Manual differs from the 1993 SNA concept of a foreign-controlled enterprise, the two concepts are alike in that both refer to ownership by a single investor (or investor group). This approach is followed in the present Manual not only for consistency with the SNA (and with BPM5 and BD3, both of which use ownership by a single investor or investor group in defining direct investment), but also because it is only through a single investor or associated investor group that control can be systematically exercised. However, the relevance—both for GATS purposes and for globalization analysis—of other criteria for selection is acknowledged, and the Manual encourages countries that can do so to provide supplemental statistics covering cases in which foreign control may be deemed to be present, even if no single foreign direct investor holds a majority stake.

4.22. Examples of investments that might be covered on a supplemental basis are majority ownership by multiple foreign direct investors, ownership of exactly 50 per cent by a foreign direct investor, and cases in which a qualitative assessment has been made that effective control has been achieved through a minority stake in an enterprise.⁶³ These should be labelled in a way that indicates the nature of the investments in the firms covered by the statistics. Similarly, countries for which any of these groups are embedded in the basic statistics should provide explanatory notes indicating their coverage and, if possible, the aggregate amounts accounted for by them. Such supplemental statistics on affiliates that are not majority owned may be particularly relevant where majority ownership by foreigners is restricted.

4.23. The present Manual is consistent with BPM5 and BD3 in including in FATS statistics all types of firms, including the so-called special purpose entities (SPEs), if they otherwise meet the criteria for selection. Whatever their structure (e.g., holding company, base company, regional headquarters) or purpose (e.g., administration, management of foreign exchange risk, facilitation of financing of investment), SPEs are an integral part of the structure of the direct investment network, and their activities and products should be included, as appropriate, in the compilation of FATS statistics.⁶⁴

4.24. Statistics on foreign affiliates owned by residents of the compiling economy should include all majority-owned foreign affiliates, irrespective of whether the affiliate is held directly or indirectly and irrespective of whether the direct investor in the compiling economy is the ultimate owner or is, instead, an intermediate owner in an ownership chain.⁶⁵ However, because the activities of an affiliate held through an ownership chain could be recorded in the outward FATS statistics of the countries of both the ultimate and intermediate owners, countries are encouraged to indicate the aggregate share of FATS variables accounted for by foreign affiliates for which the compiling country is an intermediate rather than final owner.

2. Types of producers

4.25. Because FATS as used in the present Manual stands for foreign affiliates trade in services, it might be expected that FATS statistics should cover producers of services only. However, the Manual recommends that producers of goods be covered as well. Some firms produce both goods and services, and it is only by coverage of all producers that the activities of producers for which provision of services is a secondary activity would be reflected in the statistics. In addition, coverage of all producers allows for the activities of services producers to be examined in the context of statistics covering all firms. As explained in paragraph 4.39 below, the method for attributing and presenting FATS variables by activity and, to the extent possible, selected ones by product, rather than the limitation of the universe of producers to service producers alone, is the mechanism recommended for isolating services from goods.

1. By country

4.30. The issues to be addressed in attributing variables by country differ as between inward FATS and outward FATS. For inward FATS, a choice must be made between attribution to the immediate investing country and attribution to the ultimate investing country. For outward FATS, the issue is whether to attribute variables to the immediate host country or to the ultimate host country. (As noted in para. 4.24 above, both directly and indirectly held affiliates are to be included in the FATS universe.)

4.31. For FATS statistics, the need to follow investments to their ultimate origins or destinations reflects both the nature and uses of the statistics. These issues are discussed below with respect to each type of investment, and recommended bases of attribution are given.

(a) Inward FATS

4.32. For foreign-owned affiliates in the compiling economy, the question is whether to attribute FATS variables to the country of the immediate investor (first foreign parent) or to that of the ultimate investor (ultimate beneficial owner (UBO)) (for a discussion of these two ownership concepts, see box 8). Commonly, the first foreign parent and the UBO are one and the same, but in many cases they differ. Thus, it is necessary to determine the primary principle to be applied. Some perspective on the matter may be gleaned from a review of relevant information concerning recommendations for FDI statistics, the Eurostat task force report mentioned above and an OECD-Eurostat questionnaire on the subject.

4.33. Both BPM5 and BD3 recommend that FDI balance of payments flows be compiled only in respect of the immediate investing country, a practice followed by virtually all countries. With respect to direct investment positions, BPM5 recommends that these should be allocated to the country of the immediate host or investing country. BD3 suggests that positions should also be compiled separately with respect to the ultimate host or controlling country.

4.34. The Eurostat FATS Task Force report (see footnote 60 above) recommended that the UBO be considered as the first priority to define the level of control because it is the most relevant. It observed that this principle can be very complex to follow in practice, and thus it proposed that initially the country of the first foreign parent could be used as a substitute, with the possibility of later obtaining data on the basis of UBO to be explored. However, in a pilot study, conducted in the framework of structural business statistics, data were successfully collected on the UBO basis by most participants. Also, the United States has collected data on this basis for some time. In the light of this successful experience, the UBO basis is to be recommended in the proposed OECD manual of economic globalization indicators.

Box 8.

Immediate and ultimate investors

Foreign-owned affiliates in the compiling economy may be grouped geographically based on the country of the immediate investor (first foreign parent) or the country of the ultimate investor (ultimate beneficial owner). The first foreign parent is the first foreign person in the chain of ownership of the affiliate. The UBO is the first person in the chain - beginning with and including the first foreign parent - that is not majority owned by another person. The following examples illustrate how these entities may be identified in particular cases. In each case, the chain of ownership runs from top to bottom, with the company at the bottom being the foreign-owned affiliate whose ownership is at issue.

I	II	III	IV	V	VI
Company A	Company C	Company F	Company I	Company L	Company O
|	|	|	|	|	|
100%	80%	70%	40%	100%	50%
|	|	|	|	|	|
Company B	Company D	Company 0	Company J	Company M	Company P
	|	|	|	|
	80%	60%	90%	40%
	|	|	|	|
	Company E	Company H	Company K	Company N

View Table

I	II	III	IV	V	VI
Company A	Company C	Company F	Company I	Company L	Company O
|	|	|	|	|	|
100%	80%	70%	40%	100%	50%
|	|	|	|	|	|
Company B	Company D	Company 0	Company J	Company M	Company P
	|	|	|	|
	80%	60%	90%	40%
	|	|	|	|
	Company E	Company H	Company K	Company N

Case I.	Company A is both the foreign parent and the UBO of company B.
Case II.	Company D is the foreign parent of company E. Because company D is, in turn, majority owned by company C, company C is the UBO of company E; its country would be considered the country of ownership of company Ε in FATS statistics.
Case III.	Following the same reasoning as in Case II, company G is the foreign parent of company H, while company F is its UBO. Note that company F’s indirectly held ownership in company H is only 42 per cent—the product of its 70 per cent share of company G and company G’s 60 per cent share in company H. Company H is nonetheless included in FATS statistics as a foreign-owned affiliate because the majority ownership criterion relates to the ownership interest of the first foreign parent (which is the direct investor), rather than to that of the UBO. Despite company F’s lack of majority ownership, it can be presumed to control company H because each entity in a chain of majority ownerships can control the entity below it, including that entity’s actions with respect to the entities that are, in turn, below it.
Case IV.	Company J is both the foreign parent and the UBO of company K. Company I is not the UBO because it is not the majority owner of company J.
Case V.	Company M is the foreign parent of company N. Because company M is, in turn, majority owned by company L, company L is the UBO of company N. However, company Ν is not covered by FATS statistics because it is not majority owned by its foreign parent.
Case VI.	Company O is both the foreign parent and the UBO of company P. Company Ρ is not covered by FATS statistics because it is not majority owned by its foreign parent, but it nonetheless represents a case that may be deemed relevant for the purposes of GATS or globalization analysis. Thus, the compiling country may wish to show data for company Ρ (and other cases of interest) on a supplemental basis (see paras. 4.21 and 4.22 above).

View Table

Case I.	Company A is both the foreign parent and the UBO of company B.
Case II.	Company D is the foreign parent of company E. Because company D is, in turn, majority owned by company C, company C is the UBO of company E; its country would be considered the country of ownership of company Ε in FATS statistics.
Case III.	Following the same reasoning as in Case II, company G is the foreign parent of company H, while company F is its UBO. Note that company F’s indirectly held ownership in company H is only 42 per cent—the product of its 70 per cent share of company G and company G’s 60 per cent share in company H. Company H is nonetheless included in FATS statistics as a foreign-owned affiliate because the majority ownership criterion relates to the ownership interest of the first foreign parent (which is the direct investor), rather than to that of the UBO. Despite company F’s lack of majority ownership, it can be presumed to control company H because each entity in a chain of majority ownerships can control the entity below it, including that entity’s actions with respect to the entities that are, in turn, below it.
Case IV.	Company J is both the foreign parent and the UBO of company K. Company I is not the UBO because it is not the majority owner of company J.
Case V.	Company M is the foreign parent of company N. Because company M is, in turn, majority owned by company L, company L is the UBO of company N. However, company Ν is not covered by FATS statistics because it is not majority owned by its foreign parent.
Case VI.	Company O is both the foreign parent and the UBO of company P. Company Ρ is not covered by FATS statistics because it is not majority owned by its foreign parent, but it nonetheless represents a case that may be deemed relevant for the purposes of GATS or globalization analysis. Thus, the compiling country may wish to show data for company Ρ (and other cases of interest) on a supplemental basis (see paras. 4.21 and 4.22 above).

4.35. Abstracting from practical considerations, the country of ultimate beneficial ownership is conceptually preferable for the attribution of variables concerning industrial activity because that is the country that ultimately owns or controls - and therefore derives the benefits from owning or controlling - the direct investment enterprise. In the light of the relevance of the UBO basis and the demonstration by a number of countries that compilation on this basis is feasible, the present Manual recommends the UBO basis as the first priority for compilation of FATS statistics and the basis on which estimates should be prepared in the greatest detail. However, considering that information on first foreign parents may be available as a by-product of linkages to FDI data and to facilitate comparisons with these data, countries are encouraged to make available some data in which variables are attributed according to the country of the first foreign parent.

2. By activity and by product

4.39. Ideally, it would be possible to attribute all FATS variables on the basis of the industrial activities of producers and, in addition, particular variables, such as sales or output, exports and imports by the types of services products produced and sold. Data on a product basis would identify the specific types of services delivered through the commercial presence mode of supply and could most readily be compared with data on services delivered through trade between residents and non-residents. However, some FATS variables, such as value added and employment (discussed below), do not lend themselves to a product classification. Also, for some countries, FATS statistics may be developed as a subset of domestic enterprise or other statistics that are classified only on an activity basis. On this basis, all of the data for a given enterprise are classified in the single activity—often termed the “primary” activity—that, based on some key variable (such as employment or sales), is the largest. Finally, for some purposes, the data may need to be viewed in conjunction with data on stocks and flows of foreign direct investment, which normally would be classified by activity but not by product.

4.40. Taking these factors into account, an activity basis is recommended as the first priority for FATS statistics. However, as a longer-term goal, countries are encouraged to work toward providing product detail for the items that can be classified on this basis. Countries that are building on existing data systems that already include product detail will probably wish to use this detail from the outset in their tabulation and presentation of FATS statistics, because it could help them in monitoring commitments under GATS that are specified in terms of services products. Similarly, countries that are building their FATS data systems from the ground up should consider the feasibility of providing for a product dimension.

(a) By activity

4.41. The present Manual recommends that, for reporting to international organizations, FATS variables be classified by activity according to ISIC, Rev.3 and grouped according to the ISIC Categories for Foreign Affiliates (ICFA), which have been derived from ISIC. These categories, shown in table 3, cover all activities, but with more detail provided for services than for goods.⁶⁷ This all-inclusive basis of presentation allows activities of services enterprises to be viewed in the context of the activities of all enterprises. In addition, it provides a framework for displaying services produced as a secondary activity by enterprises classified as goods producers. Finally, this all-inclusive approach has been adopted by the countries and international organizations that are actively developing FATS statistics.⁶⁸

Table 3.

ISIC Categories for Foreign Affiliates (ICFA)

Note: The following ISIC categories have been excluded from ICFA because they are not relevant to foreign direct investment or FATS: public administration and defence; compulsory social security (ISIC division 75), private households with employed persons (division 95); and extraterritorial organizations and bodies (division 99). All other ISIC categories are included.

Table 3.

ISIC Categories for Foreign Affiliates (ICFA)

ICFA headings / elements
				ISIC code
1.		Agriculture, hunting, forestry, and fishing		01,02,05
	1.1. Agriculture, hunting, and related service activities			01
	1.2. Forestry, logging, and related service activities			02
	1.3. Fishing, operation of fish hatcheries and fish farms; services activities incidental to fishing			05
2.		Mining and quarrying		10,11,12,13,14
			Of which: Services activities incidental to oil and gas extraction excluding surveying	112
3.		Manufacturing		15 to 37
4.		Electricity, gas, and water supply		40,41
5.		Construction		45
6.		Trade and repair		50,51,52
	6.1. Sale, maintenance, and repair of motor vehicles and motorcycles; retail sale of automotive fuel			50
	6.2. Wholesale trade and commission trade, except of motor vehicles and motorcycles			51
	6.3. Retail trade, except of motor vehicles and motorcycles; repair of personal and household goods			52
7.		Hotels and restaurants		55
8.		Transport, storage, and communications		60,61,62,63,64
	8.1. Transport and storage			60,61,62, 63
		8.1.1. Land transport; transport via pipelines		60
			8.1.1.1. Transport via railways	601
			8.1.1.2. Other land transport	602
			8.1.1.3. Transport via pipelines	603
		8.1.2. Water transport		61
			8.1.2.1. Sea and coastal water transport	611
			8.1.2.2. Inland water transport	612
		8.1.3. Air transport		62
			8.1.3.1. Scheduled air transport	621
			8.1.3.2. Non-scheduled air transport	622
		8.1.4. Supporting and auxiliary transport activities; activities of travel agencies		63
			8.1.4.1. Supporting and auxiliary transport activities	6301,6302,6303,6309
			8.1.4.2. Activities of travel agencies and tour operators; tourist assistance activities, not elsewhere classified (n.e.c).	6304
	8.2. Post and telecommunications			64
		8.2.1. Post and courier activities		641
		8.2.2. Telecommunications		642
9.		Financial intermediation		65,66,67
	9.1. Financial intermediation, except insurance and pension funding			65
	9.2. Insurance and pension funding, except compulsory social security			66
		9.2.1. Life insurance		6601
		9.2.2. Pension funding		6602
		9.2.3. Non-life insurance		6603
	9.3. Activities auxiliary to financial intermediation			67
		9.3.1. Activities auxiliary to financial intermediation, except insurance and pension funding		671
		9.3.2. Activities auxiliary to insurance and pension funding		672
10.		Real estate activities		70
11.		Renting of machinery and equipment without operator and of personal and household goods		71
12.		Computer and related activities		72
13.		Research and development		73
14.		Other business activities		74
	14.1. Legal, accounting, market research, and consultancy			741
		14.1.1. Legal activities		7411
		14.1.2. Accounting, bookkeeping, and auditing activities; tax consultancy		7412
		14.1.3. Market research and public opinion polling		7413
		14.1.4. Business and management consultancy activities		7414
	14.2. Architectural, engineering, and other technical activities			742
	14.3. Advertising			743
	14.4. Business activities, n.e.c.			749
15.		Education		80
16.		Health and social work		85
17.		Sewage and refuse disposal, sanitation, and similar activities		90
18.		Activities of membership organisations, n.e.c.		91
19.		Recreational, cultural, and sporting activities		92
	19.1. Motion picture, radio, television, and other entertainment activities			921
	19.1.1. Motion picture and video production and distribution; motion picture projection			9211,9212
	19.1.2. Radio and television activities			9213
	19.1.3. Other arts and entertainment activities			9214,9219
	19.2. News agency activities			922
	19.3. Library, archives, museums, and other cultural activities			923
	19.4. Sporting and other recreational activities			924
20.		Other service activities		93

Note: The following ISIC categories have been excluded from ICFA because they are not relevant to foreign direct investment or FATS: public administration and defence; compulsory social security (ISIC division 75), private households with employed persons (division 95); and extraterritorial organizations and bodies (division 99). All other ISIC categories are included.

View Table

Table 3.

ISIC Categories for Foreign Affiliates (ICFA)

ICFA headings / elements
				ISIC code
1.		Agriculture, hunting, forestry, and fishing		01,02,05
	1.1. Agriculture, hunting, and related service activities			01
	1.2. Forestry, logging, and related service activities			02
	1.3. Fishing, operation of fish hatcheries and fish farms; services activities incidental to fishing			05
2.		Mining and quarrying		10,11,12,13,14
			Of which: Services activities incidental to oil and gas extraction excluding surveying	112
3.		Manufacturing		15 to 37
4.		Electricity, gas, and water supply		40,41
5.		Construction		45
6.		Trade and repair		50,51,52
	6.1. Sale, maintenance, and repair of motor vehicles and motorcycles; retail sale of automotive fuel			50
	6.2. Wholesale trade and commission trade, except of motor vehicles and motorcycles			51
	6.3. Retail trade, except of motor vehicles and motorcycles; repair of personal and household goods			52
7.		Hotels and restaurants		55
8.		Transport, storage, and communications		60,61,62,63,64
	8.1. Transport and storage			60,61,62, 63
		8.1.1. Land transport; transport via pipelines		60
			8.1.1.1. Transport via railways	601
			8.1.1.2. Other land transport	602
			8.1.1.3. Transport via pipelines	603
		8.1.2. Water transport		61
			8.1.2.1. Sea and coastal water transport	611
			8.1.2.2. Inland water transport	612
		8.1.3. Air transport		62
			8.1.3.1. Scheduled air transport	621
			8.1.3.2. Non-scheduled air transport	622
		8.1.4. Supporting and auxiliary transport activities; activities of travel agencies		63
			8.1.4.1. Supporting and auxiliary transport activities	6301,6302,6303,6309
			8.1.4.2. Activities of travel agencies and tour operators; tourist assistance activities, not elsewhere classified (n.e.c).	6304
	8.2. Post and telecommunications			64
		8.2.1. Post and courier activities		641
		8.2.2. Telecommunications		642
9.		Financial intermediation		65,66,67
	9.1. Financial intermediation, except insurance and pension funding			65
	9.2. Insurance and pension funding, except compulsory social security			66
		9.2.1. Life insurance		6601
		9.2.2. Pension funding		6602
		9.2.3. Non-life insurance		6603
	9.3. Activities auxiliary to financial intermediation			67
		9.3.1. Activities auxiliary to financial intermediation, except insurance and pension funding		671
		9.3.2. Activities auxiliary to insurance and pension funding		672
10.		Real estate activities		70
11.		Renting of machinery and equipment without operator and of personal and household goods		71
12.		Computer and related activities		72
13.		Research and development		73
14.		Other business activities		74
	14.1. Legal, accounting, market research, and consultancy			741
		14.1.1. Legal activities		7411
		14.1.2. Accounting, bookkeeping, and auditing activities; tax consultancy		7412
		14.1.3. Market research and public opinion polling		7413
		14.1.4. Business and management consultancy activities		7414
	14.2. Architectural, engineering, and other technical activities			742
	14.3. Advertising			743
	14.4. Business activities, n.e.c.			749
15.		Education		80
16.		Health and social work		85
17.		Sewage and refuse disposal, sanitation, and similar activities		90
18.		Activities of membership organisations, n.e.c.		91
19.		Recreational, cultural, and sporting activities		92
	19.1. Motion picture, radio, television, and other entertainment activities			921
	19.1.1. Motion picture and video production and distribution; motion picture projection			9211,9212
	19.1.2. Radio and television activities			9213
	19.1.3. Other arts and entertainment activities			9214,9219
	19.2. News agency activities			922
	19.3. Library, archives, museums, and other cultural activities			923
	19.4. Sporting and other recreational activities			924
20.		Other service activities		93

Note: The following ISIC categories have been excluded from ICFA because they are not relevant to foreign direct investment or FATS: public administration and defence; compulsory social security (ISIC division 75), private households with employed persons (division 95); and extraterritorial organizations and bodies (division 99). All other ISIC categories are included.

4.42. Primarily because the activities carried out by a given firm are usually not limited to its activity of classification, the data recorded against any given activity must be interpreted as an indication of total activity of firms for which the given activity is the most important, or primary, activity, rather than as a precise measure of the activity itself.⁶⁹ For the same reason, as well as because of differences in the classifications themselves, the extent to which data on resident/nonresident trade classified according to EBOPS can be aligned with data on FATS variables classified according to ICFA is inherently limited. Nonetheless, a correspondence between the two bases of classification may be useful for some purposes, mainly involving activities that tend to be carried out only by firms that are specialized in the activity and tend not to have significant secondary activities.⁷⁰ For such purposes, the EBOPS categories corresponding most closely to the ICFA categories for services activities have been indicated in annex IV, table A.IV.1. The reverse correspondence is shown in annex IV table A.IV.2.

4.43. The present Manual recognizes that data for particular ICFA categories may sometimes have to be suppressed (that is, not separately shown) to preserve the confidentiality of data for individual companies. This will most often happen at the most detailed level of the classification, or in the case of smaller countries, or where the data are cross-classified by country or area.

1. Sales (turnover) and/or output

4.48. Sales and turnover are used here interchangeably to mean the same thing. Following the 1993 SNA (which may be consulted for additional details and examples), output differs from sales because it includes changes in stocks of finished goods and work in progress and because of differences in measurement applicable to activities involving trade or financial intermediation. Output is a superior and more refined measure of activity for most purposes and is recommended as the preferred variable for compilation. However, sales data are easier to collect and may present more options for disaggregation. Thus, there may be a continuing role in FATS statistics for both measures.

4.49. Services activities do not involve stocks of finished goods, and changes in work-in-progress will usually be impossible to measure. In practice, therefore, measured output will be identical to sales for most service activities. For wholesale and retail distribution, although the sales are of goods, the output is defined as a service, equal not to the total value of sales but to the trade margins realised on goods purchased for resale. For financial intermediaries, output is equal to service charges actually levied, plus financial intermediation services indirectly measured, the values of which are estimated from the difference between the property incomes received by financial intermediaries from the investment of borrowed funds, and the interest they themselves pay on such funds (see box 5). For insurance, output is measured not by total premiums earned but by a service charge that takes into account income on technical reserves and also the actual or expected value of claims. In all these cases, output will generally be considerably lower than sales because it, that pass through the enterprise without being considered unlike sales, excludes the amounts - which may a part of its intermediate consumption, constitute a large portion of total operating revenues - that pass through the enterprise without being considered a part of its intermediate consumption.

4.50. Sales measures gross operating revenues, less rebates, discounts and returns. Sales should be measured exclusive of consumption and sales taxes on consumers and value-added taxes. Although lacking the duplication-free quality of value added, the sales variable generally presents fewer collection difficulties and thus is likely to be more widely available than value added. Also unlike value added, sales indicates the extent to which foreign affiliates are used to deliver outputs to customers, irrespective of the extent to which the output originated in the affiliates themselves or in other firms. Further, sales are more comparable than value added with regard to such variables as exports and imports, which are themselves measures of sales.

4.51. In addition to disaggregation by industry and by country (following the principles of attribution discussed earlier), other breakdowns of sales may be useful for particular purposes. One such breakdown is to distinguish among sales within the host country (local sales), sales to the country of the parent enterprise (i.e., the immediate investor), and sales to third countries.⁷¹ All three types of sales result from a commercial presence by the home country in the host country. However, only the local sales represent the delivery of output within host economies and thus relate directly to the commitments made under the GATS Mode 3 by those economies. In addition, elimination of the sales to the parent country (which would already be included as imports in that country’s balance of payments accounts) may be desired in an analysis of FATS variables in conjunction with data on the parent country’s trade with non-residents, to avoid duplication.

4.52. As a medium-term goal, countries might attempt to disaggregate sales within each industry as between sales of goods and sales of services so as to obtain a measure of sales of services. As mentioned in paragraph 4.45 above on the attribution of FATS variables, such a breakdown would represent a first step toward a product breakdown of sales. Sales of services would include both sales of services by enterprises that produce services as a primary activity and sales of services by enterprises that produce goods as a primary activity but have secondary operations in services.

4.53. The potential usefulness of this extension is considerable, and countries that are able to provide this data are encouraged to do so. It is likely that a significant share of sales of services by affiliates is accounted for by affiliates whose primary industry is manufacturing or another goods producing industry. For example, sales of computer services might, as noted earlier, be spread among manufacturing affiliates, wholesale trade affiliates and computer services affiliates. If only total sales were collected, then by default only the sales by the affiliates classified in computer services would be taken as a measure of sales of such services, resulting in a significant understatement.

4.54. As a longer-term goal, countries are encouraged to work toward developing product detail on sales, on a basis compatible with EBOPS.⁷²

2. Employment

4.55. In a FATS context, employment would normally be measured as the number of persons on the payrolls of foreign affiliates. Employment data are sometimes converted to a full-time equivalent (FTE) basis, in which part-time workers are counted according to the time worked (e.g., two workers on half-time schedules count the same as one full-time worker). Although FTE employment may provide a better measure of labour input, this measure is not as widely available as numbers of employees and may be difficult to implement consistently in the context of internationally varied employment practices. For those reasons, the recommendation of the present Manual is that the FATS employment variable be the number of persons employed. The number should be representative of the period covered, but in the absence of strong seasonal or other fluctuations in employment, it may be measured as of a point in time, such as the end of the year, following national practices.

4.56. Data on employment by affiliates can be used in several ways in a FATS system. They can be used to determine the share of foreign affiliates in host country employment, or to help determine the extent to which employment by foreign affiliates complements or substitutes for domestic (home country) employment by parent companies or other domestic firms. An industry breakdown of affiliates’ employment can yield further insights into the impact of foreign-owned enterprises on specific parts of the economy. Used in conjunction with data on compensation of employees—one of the “additional” variables suggested below—the employment variable may be used in examining compensation practices of affiliates relative to those of domestically owned firms.

Relation to presence of natural persons mode of supply

4.57. Although data would not, in general, appear to be available to identify separately the portion of employment by affiliates that is accounted for by employees from abroad, such information, if available, could be used for elaborating on the GATS presence of natural persons mode of supply. Annex I explores the issues that will arise in constructing a framework of statistics to use during negotiations on this mode of supply.

3. Value added

4.58. The 1993 SNA defines gross value added of an establishment, enterprise, industry or sector as the amount by which the value of the outputs produced exceeds the value of the intermediate inputs consumed. A related concept, “net value added”, is defined as gross value added less the consumption of fixed capital. Gross value added can provide information about the contribution of foreign affiliates to host country gross domestic product, both in the aggregate and in specific industries. For this reason and because it may often be easier to compute (because it does not require estimation of capital consumption) and is thus more widely available, the higher priority should be accorded to the gross measure of value added.

4.59. Although it is defined in terms of outputs and intermediate inputs, value added is also equal to the sum of primary incomes generated in production (compensation of employees, profits etc.). In some cases, depending on the particular data that are available, this equivalence may be exploited in deriving estimates of value added. This alternative could be chosen, for example, if data on intermediate consumption were lacking but information on the various incomes generated in production were available.

4.60. Because it includes only the portion of the firm’s output that originates within the firm itself, value added is a particularly useful measure from the perspectives of both GATS and globalization analysis. It is for this reason that it has been included among the “basic” FATS variables, even though, as a measure that may have to be estimated or derived from other variables, it may be among the more difficult variables to compile. For inward FATS, value added will often be available from regular industrial or enterprise surveys, but for outward FATS it may have to be derived from other variables.

4. Exports and imports of goods and services

4.61. International goods and services transactions of foreign affiliates is another basic indicator relevant to FATS. Both balance of payments data and data provided by parent enterprises and affiliates in separate questionnaires may be appropriate sources for such information. To a large extent, the possibilities for disaggregating total exports and total imports may depend on the sources used to obtain the data.

4.62. Where the data are obtained through linkages with primary data sources for balance of payments transactions, breakdowns by product and by origin or destination will often be possible. In this event, exports and imports of services may be disaggregated, not only by the primary activity of the affiliate according to ICFA but also by product on a basis compatible with the EBOPS.

4.63. Although linkages with balance of payments data may thus provide useful information, it often will be difficult or impossible to separately identify the transactions of foreign-owned firms in those data. Thus, it may be possible to develop the data on exports and imports only through the use of separate questionnaires. In that event, those same breakdowns would be useful, but it is unlikely that a large number of countries would be able to collect the necessary data with the same frequency or in the same detail as provided by balance of payments data. However, it may be possible to disaggregate exports and imports into a few broad categories in which trade with related enterprises would be distinguished from trade with unrelated parties, thus providing information for one of the last of the elements for a phased approach to implementation of the Manual.⁷³ In addition, trade with the country of the parent enterprise could be distinguished from trade with other countries. If possible, those breakdowns should be obtained separately for goods and services. For inward FATS, for example, that would mean disaggregating the affiliate’s exports of goods and exports of services into (a) exports to the parent enterprise, (b) other exports to the country of the parent, and (c) exports to third countries. Imports would be similarly disaggregated.

5. Number of enterprises

4.64. The number of enterprises (or establishments, where that is the statistical unit) meeting the criteria for coverage by FATS statistics is a basic indicator of the prevalence of majority ownership by foreigners in the host economy. That number may be compared with the total number of firms (or establishments) in the economy. It may also be assessed in relation to the other FATS variables because it allows the computation of ratios - such as value added or number of employees per enterprise - that may be compared with the same ratios for domestically owned firms, thus giving an indication of the behaviour of foreign affiliates.

4.65. It should be recognized that the number of firms alone may not give an accurate picture of the overall importance of foreign-owned firms, because of differences in size between these firms and those that are domestically owned. If the foreign-owned firms tend to be larger, for example, then their share in the total number of firms would be smaller than their share in the various measures of operations and would thus tend to understate the role and importance of these firms in host country economies.

4.66. Typically, information on numbers of enterprises will be a natural by-product of collection of data on other FATS variables, rather than a separate object of the data-collection effort. As such, the number is likely to be affected, often significantly, by the level of company consolidation and by thresholds for reporting on surveys. To assist users in interpreting counts of enterprises (or establishments), countries are encouraged to indicate in explanatory notes how the numbers were derived.

6. Other variables

4.67. Although not included as priority items, there are other FATS variables of significance, perhaps for certain countries of equal or greater importance than some of those previously discussed. As is the case for the priority items, comparisons with the total economy and with specific sectors can be effected and used for assessing the impact of foreign-controlled enterprises on home and host economies.

4.68. Among such variables are the following, which are already collected by some countries (definitions are drawn from the 1993 SNA, which may be consulted for additional details):

1. Assets: entities over which ownership rights are enforced and from which economic benefits may be derived by their owners by holding or using them, including both financial assets and non-financial assets, whether produced or non-produced;

2. Compensation of employees: the total remuneration, in cash or in kind, payable by an enterprise to an employee in return for work done by the employee during the accounting period;

3. Net worth: the difference between the value of all assets—produced, non-produced, and financial—and all liabilities;

4. Net operating surplus: measured as value added (gross), less compensation of employees, consumption of fixed capital and taxes on production, plus subsidies receivable;

5. Gross fixed capital formation: measured by the total value of a producer’s acquisitions, less disposals, of fixed assets during the accounting period, plus certain additions to the value of non-produced assets realized by productive activity (fixed assets are defined as produced assets that are themselves used repeatedly or continuously in processes of production for more than one year);

6. Taxes on income: these consist of corporate income taxes, corporate profit taxes, corporate surtaxes etc. as well as taxes that accrue to owners of unincorporated enterprises as a result of the income of those enterprises. Taxes on income include only taxes in the host country of the affiliate and not any taxes paid by the parent in the home country as a result of income earned or distributed by the affiliate. Taxes on income are usually assessed on the total income of corporations from all sources and not simply on profits generated by production;

7. Research and development expenditures: expenditures for activities undertaken for the purpose of discovering or developing new products (goods and services), including improved versions or qualities of existing products, or discovering or developing new or more efficient processes of production.